fomc 19920818 g bpt 219920813
TRANSCRIPT
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Confidential (FR) Class III FOMC
August 13, 1992
RECENT DEVELOPMENTS
Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System
CONTENTS
II DOMESTIC NONFINANCIAL DEVELOPMENTSEmployment and unemployment.......................................Industrial production......................... .................. . .. 5Personal income and consumption ................................... 9Housing markets........................ ...... .................... . 15Business fixed investment.......................................... 17Business inventories................................ ............. 23Federal sector..................................................... 27State and local government sector.................................. 31Labor costs......................... ................ ............. 33Prices...................................... . ... .................. 39
TablesChanges in employment............................................. 2Unemployment and labor force participation rates.................. 2Production of domestic autos and trucks........................... 5Growth in selected components of industrial production............. 6Capacity utilization.............................................. 6Personal income......... ......................... .. ............... 8Real personal consumption expenditures............................. 8Retail sales................................................... ... . 12Sales of automobiles and light trucks................... . ..... .... 13Private housing activity........................................... 14Business capital spending indicators............................... 18Changes in manufacturing and trade inventories.................... 24Inventories relative to sales..................................... 24Federal government outlays and receipts.......................... 26Administration policy budget projections ............................ 28Administration economic assumptions... .......................... . 28CBO budget estimates. ...................................... ...... 30CBO economic assumptions .......................................... 30Employment cost index ............................................. 34Changes in negotiated wage and compensation rates under
major collective bargaining settlements....................... 37Effective wage change in major union contracts
and components of change...................................... 37Recent changes in consumer prices ................. ................... 38Recent changes in producer prices................................. 38Monthly average prices--West Texas Intermediate .................. 40Inflation rates excluding food and energy........................ 42Price indexes for commodities and materials....................... 44
ChartsLabor market indicators........................................... 4Manufacturing sector indicators................................... 7Personal consumption expenditures, and consumer attitudes......... 10Private housing starts............................................ 14Mortgage Bankers Association purchase index and new home sales.... 16Recent data on orders and shipments............................... 20Real PDE aircraft outlays, total Boeing domestic orders, and real
equipment investment and cash flow............................ 21Nonresidential construction and selected indicators................ 22Ratio of inventories to sales...................................... 25State and local sector ............................................ 32
ii
Employment cost index.............................................. 36Compensation in union contracts ................................... 37Daily spot and posted prices of West Texas Intermediate........... 40Index weights................... .................................... 44Commodity price measures .. ........ ............................... 46
III DOMESTIC FINANCIAL DEVELOPMENTSMonetary aggregates and bank credit............................... 3Business finance ..................... .............................. 9Treasury and sponsored agency financing........................... 13Municipal securities.............................................. . 14Mortgage markets .................................................. 17Consumer credit. . ............................. ..................... 21
TablesMonetary aggregates............................................... 2Commercial bank credit and short- and intermediate-term
business credit................ ... .............................. 4Gross offerings of securities by U.S. corporations.................. 8Treasury and agency financing..................................... 12Gross offerings of municipal securities ........................... 15Standard and Poor's municipal long-term debt rating actions....... 16Mortgage-backed security issuance.................................... 20Consumer credit.................................................... 22Consumer interest rates.............................................. . 22
ChartsLoans at weekly reporting banks selected by capital status........ 6Gross interest payments to cash flow .............................. 10Refinancing indexes, and FRM to ARM spread vs.
one-year ARM discount........................................ . 18Gross public issuance of consumer asset-backed securities......... 24
IV INTERNATIONAL DEVELOPMENTSMerchandise trade.................................. ................ 1Prices of exports and non-oil imports ............................. 4U.S. international financial transactions.......................... 6Foreign exchange markets .......................................... 10Developments in foreign industrial countries..................... 13Developents in East European countries and Russia................ 24Economic situation in other countries ............................. 25
TablesU.S. merchandise trade: Monthly data.................. ......... ... 1Major trade categories............................................ 2Oil imports.......... ............................................... 4Export and import price measures..................................... 5Summary of U.S. international transactions......................... 7International banking data......................................... 9Major industrial countries
Real GNP and industrial production... .... ............... ...... 15Consumer and wholesale prices................................... 16Trade and current account balances ..................... ........ 17
Weighted average exchange value of the dollar.....................Weighted average exchange value of the dollar..................... 12
DOMESTIC NONFINANCIALDEVELOPMENTS
DOMESTIC NONFINANCIAL DEVELOPMENTS
The economic expansion appears to have continued at a tepid
pace into the summer. Private final demand appears to be picking up
after a lackluster second quarter: Sales of motor vehicles firmed,
on balance, in June and July, shipments of business equipment have
strengthened, and non-auto retail sales in July more than reversed
the June decline. Falling mortgage rates appear to have spawned a
wave of refinancings, and housing demand also may be improving. But
employment and industrial production have grown little, on net,
since May, and the unemployment rate has moved up further. Recent
reports on prices and labor costs have been quite favorable.
Employment and Unemployment
The labor market reports for June and July suggest that labor
demand has been quite sluggish. Although total payroll employment
increased 135,000 between May and July, about half of the rise
reflected temporary hiring associated with the federally sponsored
summer jobs program enacted in June. Apart from this program,
most of the gain in employment between May and July reflected
moderate increases in services industries; in contrast, both
manufacturing and construction shed workers over this period. The
average workweek of production or nonsupervisory workers moved down
in June to the bottom of the range seen this year and remained at
this level in July. As a result, aggregate hours of production
workers in July stood a touch below the second-quarter average.
1. At this point, BLS estimates that the summer jobs programboosted payrolls 75,000 through the July survey week. However, theresponse rate of local government employment offices to the July
payroll survey was unusually low, and late reports could inflate thecurrent estimate of the jobs created by the program last month (and,along with it, the rise in total state and local employment).Another increase in summer jobs could show up in the Augustemployment report, as hiring continued after the July survey week.Most of these employees, however, should be off payrolls inSeptember.
II-1
II-2
CHANGES IN EMPLOYMENT 1(Thousands of employees; based on seasonally adjusted data)
1991 1992 19921990 1991 Q4 Q1 Q2 May June July
------------ Average monthly changes ----------
Nonfarm payroll employment2 -5 -79 -46 15 78 119 -63 198
Private -34 -91 -67 -4 58 115 -82 110Manufacturing -47 -36 -28 -17 -18 -4 -52 1
Durable -36 -33 -30 -16 -18 -11 -36 -26Nondurable -11 -3 2 -1 0 7 -16 27
Construction -23 -26 -23 4 0 27 -29 -15Retail trade -8 -35 -36 -7 20 -27 1 35Finance, insurance, real estate -1 -3 2 2 -1 -1 -10 -3Services 44 30 36 28 72 126 27 110Health services 31 29 29 16 20 25 11 36Business services 0 3, 13 11 40 45 16 21
Total government 29 12 21 19 19 4 19 88
Private nonfarm production workers -40 -76 -54 18 91 110 -23 57Manufacturing production workers -39 -23 -15 1 -9 -2 -31 9
Total employment3 -32 -62 -120 207 75 -19 -82 198Nonagricultural -39 -54 -87 203 56 13 -156 246
Memo:Aggregate hours of production
or nonsupervisory workers .0 -.1 .0 .1 .0 .8 -.7Average workweek (hours) 34.5 34.3 34.4 34.5 34.4 34.6 34.3 34.3
1. Average change from final month of preceding period to final month of periodindicated.
2. Survey of establishments.3. Survey of households.
UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES(Percent; seasonally adjusted)
1991 1992 19921990 1991 Q4 Q1 Q2 May June July
Civilian unemployment rate(16 years and older) 5.5 6.7 6.9 7.2 7.5 7.5 7.8 7.7
Teenagers 15.5 18.7 19.0 19.6 21.0 20.0 23.6 21.020-24 years old 8.8 10.8 11.4 11.1 11.3 11.8 11.1 11.7Men. 25 years and older 4.4 5.7 5.8 6.3 6.5 6.5 6.8 6.5Women, 25 years and older 4.3 5.1 5.3 5.6 5.8 5.6 5.9 5.9
Labor force participation rate 66.4 66.0 65.9 66.2 66.5 66.5 66.6 66.6
II-3
The survey of households supports the picture of a lethargic
labor market provided by the payroll survey. Total household
employment rose 116,000 on net in June and July, similar to the
modest net increase in nonfarm payrolls. At the same time, the
civilian labor force rose nearly 400,000 in June--the seventh
straight month with a notable increase--and then held about steady
in July. The resulting jump in the unemployment rate to an average
of 7-3/4 percent in June and July may have been overstated somewhat
by difficulties in seasonally adjusting the flow of young persons
into the labor market in early summer. Even so, most of the recent
rise in the jobless rate appears to reflect a genuine shortfall of
job creation relative to a pickup in labor supply.
Other indicators from the household survey suggest no material
change in labor market conditions over the past two months. The
share of the labor force working part time for economic reasons
fluctuated in June and July but remained around the relatively high
proportion recorded earlier this year. Similarly, the share of the
unemployed who are job losers edged down in June and July, but these
changes were fairly small compared with the usual monthly variation
in the series.
Initial claims for unemployment insurance, which had held
between 410,000 and 430,000 during June and the first three weeks of
July, jumped to nearly 480,000 during the week of July 25, and then
dropped back to 411,000 the following week. The increase in late
July was the result of layoffs associated with General Motors' two-
week shutdown and provided little information about conditions in
the labor market. 2
2. The GM shutdown likely will cause claims to spike up againin the week ending August 8, reflecting the delayed processing of
the filings in Michigan.
II-4
LABOR MARKET INDICATORS
Civilian Unemployment RatePercent
Job Losers as a Share of UnemploymentPercent
Initial Claims for Unemployment InsuranceThousands
All regular programs
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
II-5
Industrial Production
Industrial production is estimated to have increased
0.4 percent in July, retracing the June decline. (THESE DATA ARE
CONFIDENTIAL UNTIL RELEASED AT 9:15 A.M. ON AUGUST 14.) Much of the
pickup in July stemmed from increases in mining and utilities, where
special factors had held down output in earlier months. Electricity
generation, which had been weak in recent months, jumped in July.
In addition, coal output rebounded early last month with the
resumption of ore shipments after the rail strike. Manufacturing
output was unchanged in July after declining 0.2 percent in June.
Production of motor vehicles and parts was a negative for IP
again in July; motor vehicle assemblies fell to 9.4 million units at
an annual rate (FRB seasonals). Current production schedules call
for domestic auto and truck assemblies to increase to about a
10-1/2 million unit rate in August and to remain near that pace in
September. Inventories of domestic light vehicles appear to have
been reasonably well aligned with sales at the end of July. Barring
a significant weakening of sales from the July pace, the scheduled
rise in assemblies seems fairly realistic.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS(Millions of units at an annual rate; FRB seasonal basis)
1992 1992Q1 Q2 June July Aug. Sep. Q3
------- actual--------- ---- scheduled---
Domestic production 8.8 10.0 9.9 9.4 10.5 10.3 10.1Autos 5.2 6.1 6.1 5.7 6.4 6.3 6.1Trucks 3.6 3.9 3.8 3.7 4.1 4.1 4.0
Apart from motor vehicles, manufacturing output declined
0.1 percent in June and is estimated to have risen by a similar
amount in July. Production of consumer durable goods, excluding
motor vehicles, declined in both months, while output of consumer
II-6
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION(Percent change from preceding comparable period)
Proportion 1992 1992in
totalIP
1991:Q4 19911 Q1 Q2 May June July
-Annual Rate-- ----- Monthly Rate-----
Total index 100.0 -.5 -2.9 5.2 .7 -.4 .4Previous -.5 -2.9 4.5 .5 -.3
Motor vehicles and parts 4.2 8.5 -20.0 44.0 4.2 -2.4 -3.3
EXCLUDING MOTOR VEHICLESAND PARTS:
Total index 95.8 -.9 -2.1 3.8 .5 -.3 .6Products, total 57.1 -1.3 -1.4 2.2 .3 -.3 .4
Final products 42.9 -.9 -2.1 2.9 .2 -.3 .2Consumer goods 25.0 2.0 -1.2 2.8 .2 -.3 .3Durables 3.7 3.2 3.1 10.1 2.4 -.4 -.7Nondurables 20.9 1.8 -2.1 1.6 -.2 -.3 .5
Excluding energy 18.2 1.7 -.7 .9 -.2 -.2 .2
Business equipment 14.6 -1.9 -1.7 7.9 1.0 .2 .2Office and computing 2.8 4.2 13.2 22.0 1.4 2.1 2.3Industrial 3.9 -8.7 -12.1 6.4 1.8 -.7 .3Other 7.9 -.2 -1.3 3.7 .4 -.1 -.6
Defense and space equip. 4.4 -8.0 -10.9 -9.1 -.5 -.8 -1.6
Intermediate products 14.2 -2.3 .8 .1 .6 -.5 .8Construction supplies 5.3 -6.4 2.7 4.5 1.4 -.9 .3
Materials 38.7 -.2 -3.2 6.3 .9 -.2 .9Durables 18.2 -1.8 -1.7 6.3 1.3 -.2 .3Nondurables 9.0 2.3 -1.4 8.9 .3 1.1 .1Energy 10.2 .0 -6.0 2.2 .1 -1.3 3.0
Memo:Manufacturing excluding
motor vehicles and parts 80.8 -.8 -1.1 3.8 .6 -.1 .1Mining 7.3 -3.3 -7.1 4.9 .8 -1.6 2.8Utilities 7.7 1.0 -8.5 2.7 -.3 -.7 3.5
1. From the final quarter of the previous period to the final quarter of the periodindicated.
CAPACITY UTILIZATION(Percent of capacity; seasonally adjusted)
1967-91 1990 1992 1992
Avg. July Q1 Q2 May June July
Total industry 82.1 83.8 78.2 78.8 79.1 78.7 78.9
Manufacturing 81.4 83.1 77.3 77.9 78.1 77.8 77.6
Primary processing 82.3 86.1 80.5 81.3 81.4 81.5 81.7Advanced processing 81.0 81.8 76.0 76.4 76.8 76.3 75.9
II-7
MANUFACTURING SECTOR INDICATORS
MOTOR VEHICLE ASSEMBLIES(FRB Seasonals) Millions of units
1990 1991 1992
PRODUCTION WORKER HOURS (FRB seasonals)Manufacturing ex. Motor Vehicles & Parts
1990
Index, 1987 100
July
199219911991
REAL ADJUSTED DURABLE GOODS ORDERSIndex, 1987 - 100
-- - - Manufacturing IP excludingmotor vehicles and parts
Billions of dollars
Real adjusted orders*
/ June
V*
1990 1991 1992
'Adjusted durable goods orders equal bookings for durable goods industries that report unfilled orders, excluding orders for defense.nondefense aircraft, and motor vehicle parts. Nominal orders were deflated using a PPI for durable goods except transportationancninment and the BEA deflator for office comoutlna. and accountlna machinery.
II-8
PERSONAL INCOME(Average monthly change at an annual rate; billions of dollars)
1992 1992
1991 Q1 Q2 Apr. May June
Total personal income 12.8 21.6 4.9 2.8 13.9 -1.9
Wages and salaries 5.2 11.3 1.3 -5.5 14.4 -4.9Private 3.8 8.6 -.2 -7.0 12.9 -6.6
Other labor income 1.5 1.4 1.4 1.4 1.5 1.4
Proprietors' income .1 7.1 -5.3 .7 -11.8 -4.7Farm -.3 1.7 -6.4 -1.3 -12.0 -5.8
Rent .6 -. 1 3.6 1.7 4.4 4.8Dividend -.8 .1 1.2 1.2 1.2 1.3Interest -. 6 -8.6 -1.8 -1.9 -1.8 -1.8
Transfer payments 7.8 12.2 5.2 5.5 7.2 2.9
Less: Personal contributionsfor social insurance 1.1 1.9 .7 .2 1.1 .9
Less: Personal tax and nontaxpayments -.1 -5.0 2.5 4.2 2.0 1.3
Equals: Disposable personal income 12.9 26.6 2.5 -1.4 12.0 -3.2
Memo: Real disposable income 1.2 9.8 -4.7 -9.2 3.6 -8.4
REAL PERSONAL CONSUMPTION EXPENDITURES(Percent change from the preceding period)
1992 1992
1991 Q1 Q2 Apr. May June
Personal consumptionexpenditures
Durable goodsExcluding motor vehicles
Nondurable goodsExcluding gasoline
ServicesExcluding energy
Memo:Personal saving rate
(percent)
.0
-2.5-1.0
-1.5-1.6
1.61.5
-Annual
5.1
16.515.2
5.55.6
2.23.0
rate-
-. 3
-2.7-2.2
-1.6-1.7
1.0.4
4.7 4.9 5.2
----Monthly rate----
-. 1 .2 .4
-. 6 1.1 2.1.2 -. 4 .9
.3 .1 .0
.7 -. 2 .4
-. 1 .0 .2-. 1 .1 .2
5.4 5.4 4.8
II-9
nondurables (other than energy) edged up. Among the major
categories of business equipment, the output of information
processing equipment continued to rise at a rapid rate; elsewhere,
production dropped back after having posted solid increases earlier
in the spring. Output of construction supplies posted a small gain
in July; this series, though fluctuating from month to month, has
been on an uptrend this year. The indexes for durable and
nondurable materials both edged up a bit last month.
The apparent lull in manufacturing output excluding motor
vehicles over June and July follows increases between January and
May that averaged 0.4 percent per month. Looking forward, the
staff's constructed measure of adjusted durable goods orders, which
rose sharply over the second quarter (chart), is consistent with
further small gains in this sector in the current quarter.
Personal Income and Consumption
Real disposable personal income edged up at a 0.7 percent
annual rate during the second quarter. Although income growth last
quarter was held down by a decline in farm subsidy payments, the
more fundamental factor was the lack of growth in wage and salary
income. The latest labor-market report suggests that private wages
and salaries were little changed in July, as both aggregate
production worker hours and average hourly earnings were flat last
month.
Real personal consumption expenditures edged down, on average,
in the second quarter, although spending showed some improvement
toward the end of the quarter. Real PCE was up 0.4 percent in June,
with broad-based gains led by higher sales of cars and light trucks.
With outlays weaker than income, the personal saving rate rose
0.3 percentage point in the second quarter to 5.2 percent. The
recent revision to the National Income Accounts indicates that the
II-10
Personal Consumption Expenditures Excluding Motor Vehicles
* Quarterly averages
Billions of 1987 dollars
June
-
II-10
1989 1990
Personal Consumption Expenditures for Motor Vehicles
* Quarterly averages
1992
Billions of 1987 dollars
June -
I I1989
Consumer Attitudes
1990 1991 1992
Index
Conference Board survey
1 1 ) glJ 1 -
,I- ir ,
KtffAAr 1/ws/^V^ tr AAA
Michigan survey
1984 1986 1988
3180
3140
3100
3060
3020
2980
250
230
210
190
170
150
140
120
100
80
60
401980 1982 1990 1992
II-11
saving rate has trended up over the past few years from the
3-1/2 percent reading in the third quarter of 1989--consistent with
the notion that household spending has become more conservative in
response to balance sheet problems.
In July, retail sales (excluding those at auto dealers and
building material and supply stores) rose 0.7 percent after edging
down in June 3 . Within this control grouping, sales rose
considerably in both months at apparel outlets and at furniture and
appliance stores. In addition, general merchandisers reported a
sharp rise in sales last month after little net change since April.
After deflation by components of the CPI, we estimate that real
spending in the PCE control category in July stood about 1/2 percent
above the second-quarter average.
Sales of autos and light trucks dropped back in July to
12.5 million units at an annual rate. However, the decline last
month was from an elevated June level, and the average selling pace
over the past two months remained well above that observed earlier
in the year. Accelerated deliveries of vehicles to daily rental
companies, which transferred about 200,000 units of sales from July
to June, more than accounted for last month's decline in domestic
auto sales. Although sales of North American-produced light trucks
dropped 500,000 units to a 3.9 million unit annual rate, that
decline followed an unusually brisk pace of sales in June. Sales of
foreign-produced light vehicles also moved down last month; the
weakness was especially pronounced for European luxury imports.
Consumer sentiment sagged again in July. The Conference
Board's index of consumer confidence registered a sharp decline, and
the less volatile Michigan index of consumer sentiment posted a more
3. The June change was previously reported as a 0.3 percentincrease. This downward revision, combined with an offsettingupward adjustment to May, suggests little change to BEA's advanceestimate of real consumer spending in the second quarter.
II-12
RETAIL SALES
(Seasonally adjusted percentage change)
1991 1992 1992
Q4 Q1 Q2 Apr. May June
Total sales
Previous estimate
Retail control 1Previous estimate
Total excl. automotive group
Previous estimate
GAF 2Previous estimate
.0 2.7
2.7
-.7 2.2
2.2
-. 6 2.5
2.5
-1.7 5.5
5.5
.4 .3
.4
.2 .2
.3
.2 .2
.4
-.8 -. 3.0
Durable goods storesPrevious estimate
Bldg. material and supply
Automotive dealersFurniture and appliances
Other durable goods
Nondurable goods storesPrevious estimate
ApparelFood
General merchandise 3
Gasoline stations
Other nondurables 4
.9 3.83.8
-. 52.4
-1.7
-1.3
-.5 2.02.0
-2.6.3
-1.4-1.4
.0
4.0
.26.8
-. 9
1.6
1. Total retail sales less building material and supply stores and
automotive dealers, except auto and home supply stores
2. General merchandise, apparel, furniture, and appliance stores.
3. General merchandise excludes mail order nonstores; mail order
sales are also excluded in the GAF grouping.
4. Includes sales at eating and drinking places, drug and proprietary
stores.
-2.81.7
.4
.4
.1 .2.4
2.0
.2
-1.9
2.0
.0
II-13
SALES OF AUTOMOBILES AND
(Millions of units at an annualLIGHT TRUCKS 1rate; BEA seasonals)
1991 1992 1992
1990 1991 Q4 Q1 Q2 May June July
Total 13.86 12.30 12.26 12.37 13.00 12.92 13.56 12.51
Autos 9.50 8.39 8.21 8.31 8.50 8.41 8.88 8.34
Light trucks 4.36 3.91 4.05 4.06 4.50 4.51 4.68 4.18
North American 2 10.84 9.73 9.82 9.86 10.57 10.53 11.11 10.35
Autos 6.90 6.14 6.06 6.07 6.32 6.26 6.66 6.41
Big Three 5.82 4.99 5.00 5.02 5.17 5.18 5.42 5.10Transplants 1.08 1.14 1.06 1.05 1.15 1.08 1.24 1.31
Light trucks 3.95 3.59 3.76 3.79 4.25 4.26 4.45 3.94
Foreign produced 3.01 2.57 2.45 2.50 2.43 2.39 2,45 2.16
Autos 2.60 2.25 2.15 2.24 2.18 2.15 2.22 1.93
Light trucks .41 .32 .29 .27 .24 .24 .23 .24
Memo:
Domestic nameplate
Market share, total .72 .70 .72 .72 .73 .73 .73 .72
Autos .64 .63 .64 .63 .63 .64 .63 .63
Note: Data on sales of trucks and
preliminary and subject to revision.
imported autos for the current month are
1. Components may not add to totals because of rounding.
2. Excludes some vehicles produced in Canada and Mexico that are classified
as imports by the industry.
II-14
PRIVATE HOUSING(Millions of units; seasonally
ACTIVITYadjusted annual rates)
1991 1992S.. . Ql Q2
1992Apr. May June
All unitsPermitsStarts
.951.01
1.02 1.12 1.05 1.06 1.05 1.041.10 1.26 1.15 1.09 1.21 1.17
Single-family unitsPermits .75Starts .84
SalesNew homes .51Existing homes 3.22
.82 .92 .88 .87
.92 1.06 .99 .93.88 .88
1.04 1.01
.56 .62 .55 .54 .53 .573.23 3.41 3.44 3.49 3.46 3.36
Multifamily unitsPermitsStarts
.20 .19 .17 .19
.17 .20 .16 .15.18 .16.17 .16
p Preliminary. r Revised estimates.
PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Millions of units
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992
1991Annual
II-14
II-15
moderate drop. Declines were widespread among the components of
both indexes. Despite the July declines, each index remained
considerably above its depressed level around the turn of the year.
Housing Markets
Housing demand appeared to firm again just before midyear.
According to revised estimates, sales of new single-family homes
leveled off in May, rather than declining, and preliminary data show
that sales rose 8 percent in June to 572,000 units at an annual
rate. The substantial June increase suggests that the payback from
the first-quarter bulge of sales had faded and that homebuyers were
responding to the declines in rates on fixed-rate mortgages that
occurred between March and June.
The further drop in mortgage interest rates last month could be
providing a boost to housing demand. The weekly index of mortgage
applications for home purchases compiled by the Mortgage Bankers
Association increased 40 percent during July after seasonal
adjustment. This index appears to have been closely correlated
with new home sales in the past (chart). However, the limited
history of the MBA series, and a number of conceptual and practical
shortcomings in its construction, suggest that considerable caution
should be exercised in interpreting the jump in July.5 Moreover,
as yet, the anecdotal reports on housing activity have not shown the
exuberance suggested by the MBA purchase index.
4. The purchase index is seasonally adjusted by the FRB staffusing the seasonal factors for new home sales; the two-year historyof the index is too short to permit the estimation of seasonalfactors. Before seasonal adjustment, the index rose 27 percent inJuly.
5. The MBA series is based on reports from a small and varyingnumber of mortgage bankers and thus has a weak statisticalfoundation. In addition, the index is subject to judgmentaladjustments that may partly account for the tight correlation withother housing indicators. Recent staff changes at MBA also raisequestions about the consistency of recent observations with thehistorical series. Finally, the index will be an inaccurate guideto changes in new home sales whenever there are shifts in thepropensity of borrowers to submit multiple mortgage applications.
II-16
Mortgage Bankers Association Purchase Index and New Home Sales(Seasonally adjusted)
Thousands of units700
\ 4------ *%~
\ t
I\I \
New home sales (left scale) /
I
-- 140
MBA index (right scale)
- 80
SI I I I I I I I 11111111111 I I I I 11111111199 199 1992 ~~ · · ~ ~· · _
600 I-
Index--I 160
500 I-
i I1991 19921990
II-17
On the production side, single-family starts edged down in June
to an annual rate of 1.01 million units, retracing about one-quarter
of the sizable increase in May; permit issuance, which is measured
with considerably less statistical error than starts, was little
changed in May and June. Multifamily housing starts dropped back to
a 157,000 unit pace in June, only slightly above the low for the
series. Multifamily construction continues to be impeded by a
persistent oversupply of rental apartments and the resulting
restraint on rents. The vacancy rate for multifamily rental
properties increased to 9.6 percent in the second quarter
(seasonally adjusted) from an already high 9.4 percent reading in
the first quarter.
Business Fixed Investment
Business fixed investment strengthened during the first half of
this year. After a moderate increase in the first quarter, real
equipment spending jumped more than 20 percent at an annual rate in
the second quarter, reflecting continued strength in outlays for
computing equipment, a substantial rebound in domestic aircraft
deliveries, and a pickup in business purchases of motor
vehicles. In addition, outlays for industrial equipment
increased modestly last quarter, the first rise in more than three
years.
In the current quarter, equipment spending appears well
positioned to post another increase. The 5.2 percent jump in
shipments of nondefense capital goods (excluding aircraft) in June
provides an elevated starting point for third-quarter outlays. In
addition, new orders for these goods rose strongly between April and
June. Anecdotal reports indicate that the price wars among domestic
6. Revised estimates for shipments of nondefense capital goodsduring May and June suggest an upward revision of about$1-3/4 billion to BEA's advance estimate of second-quarter PDEspending.
II-18
BUSINESS CAPITAL SPENDING INDICATORS(Percent change from preceding comparable period;
based on seasonally adjusted data)
1991 1992 1992
Q4 Q1 Q2 Apr. May June
Producers' durable equipment
Shipments of nondefense capital goods .9 .5 1.5 -3.3 -.9 7.7Excluding aircraft and parts 1.2 .2 2.7 -1.8 .4 5.2Office and computing 6.8 5.0 3.9 1.8 .3 4.7All other categories -.3 -1.2 2.4 -2.9 .5 5.4
Shipments of complete aircraft 1 -23.2 65.0 n.a. -13.8 -3.9 n.a.
Sales of heavy weight trucks -1.8 6.6 5.6 7.1 -7.8 2.5
Orders of nondefense capital goods -4.0 2.5 -.2 -7.0 1.9 2.3Excluding aircraft and parts -1.3 4.0 .6 -2.9 1.6 5.3
Office and computing .4 9.2 4.6 -1.2 4.9 3.0All other categories -1.8 2.6 -.5 -3.4 .7 6.0
Nonresidential structures
Construction put-in-place -4.2 .6 -.7 -1.5 -1.8 -1.2Office -10.8 -4.9 -8.7 -3.4 -5.9 -2.5Other commercial -10.4 1.5 .1 -3.1 -.2 2.1Industrial 2.7 2.4 -6.3 -10.2 -1.3 -4.3Public utilities .8 5.2 1.3 3.8 -2.5 -2.9All other -4.2 -2.7 6.2 2.2 .1 1.1
Rotary drilling rigs in use -9.2 -4.7 -1.5 1.3 -.1 -7.4
Footage drilled 2 -1.3 -15.1 n.a. -5.7 .3 n.a.
Memo:Business fixed investment3 -5.2 3.0 13.5 n.a. n.a. n.a.
1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."Monthly data are seasonally adjusted using FRB seasonal factors constrained toBEA quarterly seasonal factors. Quarterly data are seasonally adjusted usingBEA seasonal factors.
2. From Department of Energy. Not seasonally adjusted.3. Based on constant-dollar data; percent change, annual rate.n.a. Not available.
II-19
producers of computing equipment, as well as rapid product
innovation, are continuing to spur demand for a variety of
products--especially personal computers and workstations. More
generally, real corporate cash flow has continued to rise, providing
greater wherewithal for investment outlays. On the downside,
domestic outlays for aircraft jumped in the second quarter to what
appears to be an unsustainably high level and probably will retreat
somewhat in the current quarter. The longer-term outlook for
domestic purchases of aircraft is decidedly negative, as new orders
placed with Boeing by domestic airlines have weakened further this
year (chart).
Outlays for nonresidential structures were about flat during
the first half of this year after declining sharply in 1991. Among
the components of construction, spending for commercial buildings
other than offices has firmed in recent quarters, and outlays for
public utility structures have continued to trend up. However,
construction activity in the office sector is still declining, and
recent weakness in industrial construction has offset the gains
recorded in late 1991 and early this year.
Looking ahead, new contracts for total nonresidential
construction have changed little on net for some time now (chart),
suggesting that the bulk of the contraction in spending is behind
us. Leading indicators for industrial building have actually turned
up in recent months, while those for office buildings and other
commercial structures have continued to edge down. Coldwell-Banker
estimates that the office vacancy rate for the United States as a
whole remained around 19-1/2 percent as of June 30, suggesting that
little progress has been made in absorbing the huge overhang of
vacant space. Even in the healthier industrial sector, the
II-20
RECENT DATA ON ORDERS AND SHIPMENTS
Office and Computing EquipmentBillions of dollars
-Orders- - - -Shipments
I June/I
1987 1988 1989 1990 1991 1992
Other Equipment (excluding aircraft and computers) Billions of dollarsBillions of dollars
- Orders- - - - Shipments
1989 19901987 1988 1992
II-21
Real PDE Aircraft Outlays
Billions of 1987 dollarsTotal Boeing Domestic Orders(Four-Quarter Moving Average) Index = 100 in 1987
1988 1990 1992I I I I I
1988 1990
Real Equipment Investment and Cash Flow(Four-Quarter Percent Change)
Percent
Real Domestic Corporate Cash Flow- - - - Producers' Durable Equipment
-l o
I X I
1992
1965 1970 1975 1980 1985 1990
1. Excluding dividends. With inventory valuation adjustment.
II-22
NONRESIDENTIAL CONSTRUCTION AND SELECTED INDICATORS*(Index, Dec. 1982 = 100, ratio scale)
Total Building
Construction (C)Permits (P), Contracts (CN), orNew commitments (NC)
1980 1982 1984 1986 1988 1990 1992
Office Other Commercial
1984 1986 1988 1990 1992 1984 1986 1988 1990 1992
Industrial- 240
(NC) - 180
--' 120
(C)60
1984 1986 1988 1990 1992
*Six-month moving average for all series shown. For contracts, total onlyNew commitments are the sum of permits and contracts.
Institutional
1984 1986 1988 1990 1992
includes private, while individual sectors include private and public.
II-23
relatively low rates of capacity utilization limit the need for new
facilities.
Business Inventories
BEA's advance GDP estimate indicated that nonfarm business
inventories changed little during the second quarter while final
sales of domestic businesses posted a small gain. In constant-
dollar terms, the ratio of inventories to final sales for the
nonfarm sector was estimated to have edged down to 2.57 months at
the end of the second quarter, a relatively low ratio by historical
standards.
Manufacturers' inventories, measured in current-cost terms,
posted a small decline over the second quarter. Stocks of aircraft
and parts continued to be pared, likely a planned adjustment to
declining orders for civilian aircraft over the past year and the
reductions in defense spending. Outside of the aircraft industry,
factory stocks rose moderately from April to June, retracing the
decline of the first quarter. The inventory-shipments ratio for
manufacturing has been moving down since the end of 1991; the ratio
in June was the lowest since July 1979 (chart).
In wholesale trade, inventories expanded sharply in June, with
runups reported for a wide range of goods. However, because sales
also surged, the wholesalers' inventory-sales ratio edged down in
June. On balance, the ratio has not changed much over the past
several months, remaining near the high end of the range that has
prevailed in recent years.
For retail trade, the data through May indicated that stores
were able to reverse some of the unintended stockbuilding that had
7. After the advance estimate was released, incoming data fromCensus surveys showed that manufacturing and merchant wholesaleinventories taken together expanded more rapidly during the secondquarter than BEA had assumed. The implied upward revision to thesecond-quarter inventory change is $4-1/4 billion (annual rate) incurrent-cost terms, or roughly $3-1/2 billion in constant dollars.
II-24
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;based on seasonally adjusted data)
1991 1992 1992
Q4 Q1 Q2 Apr. May June
Current-cost basis
Total 23.1 -7.9 n.a. 29.1 -7.3 n.a.Excluding auto dealers 22.1 -13.7 n.a. 6.2 -5.5 n.a.Manufacturing -14.0 -11.2 -1.4 -12.4 13.0 -4.9
Excluding aircraft -7.0 -7.1 8.2 .2 16.3 8.2Wholesale 19.9 -1.2 9.5 -2.9 -12.4 43.9Retail 17.3 4.5 n.a. 44.4 -7.9 n.a.
Automotive 1.1 5.8 n.a. 22.9 -1.8 n.a.Excluding auto dealers 16.2 -1.3 n.a. 21.6 -6.1 n.a.
Constant-dollar basis
Total 16.2 -13.2 n.a. 10.8 -1.6 n.a.Excluding auto dealers 17.0 -18.0 n.a. -5.3 -5.0 n.a.Manufacturing -11.3 -8.7 n.a. -16.7 4.5 n.a.Wholesale 15.2 -4.9 n.a. -4.0 -1.0 n.a.Retail 12.3 .5 n.a. 31.6 -5.1 n.a.Automotive -.9 4.8 n.a. 16.1 3.3 n.a.Excluding auto dealers 13.1 -4.4 n.a. 15.5 -8.4 n.a.
INVENTORIES RELATIVE TO SALES 1
(Months supply; based on seasonally adjusted data)
1991 1992 1992
Q4 Q1 Q2 Apr. May June
Current-cost basis
Total 1.54 1.52 n.a. 1.51 1.52 n.a.Excluding auto dealers 1.52 1.50 n.a. 1.49 1.49 n.a.Manufacturing 1.62 1.62 1.57 1.58 1.59 1.55
Excluding aircraft 1.45 1.45 1.41 1.42 1.42 1.39Wholesale 1.37 1.36 1.37 1.35 1.36 1.35Retail 1.58 1.54 n.a. 1.57 1.56 n.a.
Automotive 1.87 1.85 n.a. 1.92 1.89 n-a.Excluding auto dealers 1.50 1.46 n.a. 1.47 1.46 n.a.
1. Ratio of end of period inventories to average monthly sales for the period.
II-25
RATIO OF INVENTORIES TO SALES(Current-cost data)
Ratio2.1
Manufacturing
# 1 • 1 1.9Total - 1.7
10 ' ," " ' ' June - 15
SI- 1.5
June
1.3
1,2
1 - 1 - t - 1 - 1 - -- -I - 1.1
1980 1982 1984 1986 1988 1990 1992
Ratio Ratio2.7 1.7
Retail
:'\, ,': ," G.A.F.2.5 1 f , -1.li" I ,1 -.' " . *'
2.3 - 1.5
2.1 - Excluding auto - 1.4
1980 1982 1984 1986 1988 1990 1992
II-26
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS(Unified basis, billions of dollars, except where otherwise noted)
Fiscal year to date
OutlaysDeposit insurance (DI)Defense Cooperation
account (DCA)
Outlays excluding DI and DCANational defenseNet interestSocial securityMedicare and healthIncome securityOther
ReceiptsPersonal income taxesSocial insurance taxesCorporate income taxesOther
June June1991 1992
106.0 117.16.0 1.4
-.8 .0
100.722.715.725.914.99.8
11.6
103.444.534.816.57.6
115.725.915.427.218.813.614.8
120.953.138.420.88.7
Dollar PercentFY1991 FY1992 change change
968.0 1043.330.3 9.3
-38.9
976.6237.6144.8201.2128.2129.3135.5
789.9346.7300.176.466.7
-5.2
1039.2225.9150.3215 .1153.4151.0143.5
815.6348.3315.578.073.7
75.3 7.8-21.0 -69.2
33.7 -86.7
62.6-11.7
5.513.925.121.78.0
25.71.6
15.41.67.1
6.4-4.93.86.9
19.616.85.9
3.3.5
5.12.1
10.6
Deficit(+)Excluding DI and DCA
2.6 -3.8 178.1 227.7-2.7 -5.2 186.7 223.6
49.6 27.936.9 19.7
Details may not add to totals because of rounding.
II-27
occurred in the preceding two months; inventory-sales ratios in May
did not appear especially high by historical standards. An update
on retail inventories will be included in the Supplement.
Federal Sector
On an NIPA basis, real federal purchases were about flat in the
second quarter; a small decline in outlays for national defense was
offset by increases in nondefense purchases. The revised data,
which incorporate updated budget estimates from OMB, indicate that
the rise in nondefense outlays since the end of 1990--at about a
6 percent annual rate--has been somewhat more rapid than previously
thought. Even so, the new data show that total real federal
purchases fell about 4-1/2 percent over the year ended in the second
quarter, reflecting the marked downtrend in defense outlays.
The unified federal budget deficit over the first nine months
of FY1992 totaled $228 billion, up $50 billion from the comparable
period a year earlier. The data for the most recent months do not
alter the trends that have been evident over the course of FY1992--
anemic growth in receipts and rapidly rising outlays for entitlement
programs.
So far this fiscal year, receipts have increased only 3 percent
from the level recorded during the first nine months of FY1991.
Social Security taxes account for the bulk of the increase.
Personal tax payments through June were little changed from the same
period a year earlier because of the slow pace of recovery and lower
withholding rates. Corporate income tax receipts have moved up in
recent months, likely owing to the rebound in profits, but the year-
to-date increase has been only 2 percent.
Among the components of outlays, spending on health programs
has increased nearly 20 percent during FY1992, and spending for
unemployment insurance and other income-security programs has risen
II-28
ADMINISTRATION POLICY BUDGET PROJECTIONS(Billions of dollars)
Fiscal years1992 1993 1994 1995 1996 1997
Outlays 1407 1504 1527 1545 1620 1701
Receipts 1074 1163 1253 1326 1402 1464
DeficitMid-Session projection 334 341 274 218 218 237
(February projection) 400 350 212 194 181 188
Deficit ex deposit insuranceand Desert Stormcontributions
Mid-Session projection 328 282 253 248 241 271(February projection) 325 284 237 221 203 220
Memo:Deposit insurance 11 59 21 -30 -23 -34Desert Storm
contributions(-) -5 0 0 0 0 0
ADMINISTRATION ECONOMIC ASSUMPTIONS
Calendar years1992 1993 1994 1995 1996 1997
------ Percent change, Q4 to Q4-------
Real GDP 2.7 3.0 3.0 3.0 2.9 2.8
GDP deflator 3.0 3.2 3.1 3.1 3.1 3.0
CPI-U 3.1 3.3 3.2 3.2 3.2 3.1
Percent, annual average--------
Civilian unemployment rate 9.1 8.4 8.0 7.6 7.1 7.2
Interest ratesTreasury bills 3.9 4.7 5.3 5.3 5.2 5.1Treasury notes 7.3 6.9 6.7 6.6 6.6 6.6
Source: OMB, Mid-Session Review: The President's Budget and EconomicGrowth Agenda, July 1992.
II-29
almost as fast. In contrast, spending on deposit insurance has
fallen sharply because funding for the RTC lapsed at the end of
March, and outlays for national defense (excluding foreign
contributions for Operation Desert Storm) have dropped almost
5 percent thus far in FY1992.
The Administration's Mid-Session Review of the budget revised
down the deficit estimate for FY1992 to $334 billion, compared with
the $400 billion projection in February. Outlays for deposit
insurance are now estimated to be lower not only because of the
shortfall in RTC funding, but also because of the somewhat firmer
condition of the depository sector. The deficit estimate for FY1993
was adjusted down slightly to $341 billion, while the estimates for
FY1994 and beyond were increased because of deferred RTC spending,
downward adjustments to tax receipts, and higher estimates of
benefit payments for Medicare, Social Security, and other transfer
programs. Revisions to the economic projections underlying the
budget projections were minor.
The CBO released its August update of the budget outlook, which
contained revisions that were largely similar to the
Administration's. CBO now projects a FY1992 deficit of $314
billion, $20 billion below the Administration's estimate; the
difference reflects the latter's assumption of a tax cut in FY1992
and technical differences in revenues and health-related spending.
On a current services basis, the two sets of deficit estimates for
FY1993 through FY1997 are very close; the Administration's deficit
estimates shown in the table are lower because they assume enactment
of deficit reduction measures while CBO's estimates do not.
In legislative activity, the Senate began debate on a wide-
ranging tax bill that would establish tax-favored enterprise zones;
repeal the luxury tax on boats, planes, jewelry, and furs; index the
II-30CBO BUDGET ESTIMATES(Billions of dollars)
Fiscal years10OA 10995 1996 1097
1402 1493
1088 1162
314
Deficit ex deposit insuranceand Desert Stormcontributions 306
1511 1567 1644 1745
1242 1323 1390 1455
268
282
244
239
254 290
307
Memo:Deposit insuranceDesert Storm
contributions(-)
-7 -16
CBO ECONOMIC ASSUMPTIONS
Calendar years1992 1993 1994 1995 1996 1997
------- Percent change, year over year---
Real GDP 1.9 3.1 2.8 2.6 2.4 2.2
GDP deflator 2.5 3.0 3.0 3.0 3.0 3.0
CPI-U 3.2 3.4 3.4 3.4 3.4 3.4
---------- Percent, annual average---------
Civilian unemployment rate 7.5 6.8 6.1 5.9 5.7 5.6
Interest ratesTreasury bills 3.6 3.7 4.8 5.4 5.5 5.6Treasury notes 7.1 6.9 6.9 7.0 7.1 7.1
Source: CBO, Economic and Budget Outlook: An Update, August,1992.
1. The projections assume that revenues and outlays for major benefitprograms evolve according to laws in effect at the time the projections aremade, and that appropriations for other programs are consistent with thediscretionary spending caps. The projections include Social Security andthe Postal Service, which are off-budget.
Outlays
Receipts
Deficit
1909 1 09q _L__ ____ _1_1
II-31
price level above which the luxury tax is assessed on cars; and
extend a number of expiring tax breaks. The bill also includes
several provisions similar to the "economic-growth measures"
proposed by the Administration earlier this year. Among these items
are a $2,500 credit for first-time homebuyers, the restoration of
passive-loss deductions for real estate, and a liberalization of IRA
accounts; the bill does not include a cut in the capital gains tax
rate. As required by the budget rules, the bill is revenue neutral
over a five-year horizon, although it likely would result in sizable
revenue losses in later years. Work on this bill will resume after
the Senate returns from recess September 8. If passed by the full
Senate, the bill would have to be reconciled with the narrower tax
bill approved by the House in early July. 8
State and Local Government Sector
Real purchases of goods and services by state and local
governments likely declined in the second quarter after a sharp
9increase in the first quarter. On balance, purchases by these
governments have risen at only a 1-1/4 percent annual rate since the
end of 1990, a sharp slowing from the 3-3/4 percent pace averaged
between 1985 and 1990. The efforts of state and local governments
to hold the line on spending also can be seen in the marked
reduction in the growth of their payrolls since 1990 (chart).
Despite these actions, the revised NIPA data suggest that these
jurisdictions have made very little progress in reducing their
fiscal imbalances. Entitlement expenditures have continued to soar,
and tax receipts have been damped by the subdued pace of economic
8. The House bill lacks the various "economic-growth measures"included in the Senate bill; otherwise, the two bills are broadlysimilar.
9. Although BEA's advance estimate showed real state and localpurchases about unchanged in the second quarter, subsequent data onconstruction put-in-place suggest a downward revision of about$1-3/4 billion to spending.
II-32
STATE AND LOCAL SECTOR
EMPLOYMENTFour-quarter percent change
02 _-1
1987 1988 1989 1990 1991 1992
SURPLUS/DEFICIT* IN OPERATING AND CAPITAL ACCOUNTSBillions of dollars
Revised- - - - Previous
1972 1977 1982 1987 1992
"NIPA basis. Excludes social Insurance funds.
II-33
activity. Instead of falling roughly $20 billion over the past five
quarters, the deficit of operating and capital accounts, excluding
social insurance funds, is now estimated to have shrunk only
slightly since early 1991 (chart). The upward revision to the
deficit during the first half of this year largely reflects
substantially higher payments for Medicaid and a lower estimate of
interest income from the sector's holdings of securities.
Although fiscal difficulties continue to plague many states.
legislatures have not taken particularly aggressive steps of late in
trying to redress the structural imbalances that remain. Because it
is an election year, many governments have tried to avoid sizable
tax hikes and spending cuts. However, in California, this approach
has led to fiscal chaos. The state still did not have a budget in
place by mid-August, one and a half months into the fiscal year.
The current budget gap in California is estimated at nearly
$11 billion. Officials are reluctant to raise taxes after enacting
more than $6 billion in tax hikes last year, and legislators
continue to reject the significant reductions in spending on primary
and secondary education proposed by the governor.
Labor Costs
Continued slack in labor markets and moderating price inflation
have led to further slowing of compensation costs. The Employment
Cost Index (ECI) for hourly compensation for private industry
workers increased just 2.5 percent at a seasonally adjusted annual
rate over the March to June period--substantially less than in
previous quarters. Over the twelve months ended in June, hourly
compensation increased 3.7 percent, 0.7 percentage point less than
over the preceding twelve months; both the wage and salary component
and the benefits component of the ECI decelerated notably over this
period. However, the deceleration in benefits partly reflected a
II-34
EMPLOYMENT COST INDEX(Percent change from preceding period at compound annual rates;
based on seasonally adjusted data) 1
1991 1992
Mar. June Sep. Dec. Mar. June
Total compensation costs:
Private industry workers 4.9 4.5 4.1 4.0 4.0 2.5
By industry:Goods-producing 4.6 4.9 4.1 4.4 5.1 2.5Service-producing 4.9 4.5 4.1 4.0 3.3 2.1
By occupation:White-collar 6.1 4.9 4.0 2.9 4.3 2.9Blue-collar 4.6 4.1 4.9 3.7 4.4 3.2Service workers 3.8 6.1 6.3 3.3 4.3 2.5
By bargaining status:Union 5.0 4.9 4.9 3.7 7.4 3.2Nonunion 5.7 4.9 4.1 2.5 4.4 2.5
Memo:Wages and salaries 4.2 4.2 3.0 3.3 3.3 1.8Benefits 5.6 6.6 6.9 5.7 6.0 3.4
1. Changes are from final month of preceding period to final month ofperiod indicated. Percent changes are seasonally adjusted by the BLS.Data by bargaining status are not seasonally adjusted.
EMPLOYMENT COST INDEX(Private industry workers; twelve-month percent changes)
1991 1992
1990 1991 June Sep. Dec. Mar. June
Total compensation costs:
Private industry workers 4.6 4.4 4.4 4.5 4.4 4.2 3.7
By industry:Goods-producing 4.8 4.6 4.4 4.5 4.6 4.6 4.1Service-producing 4.6 4.3 4.4 4.5 4.3 4.0 3.5
By occupation:White-collar 4.9 4.5 4.5 4.4 4.5 4.0 3.5Blue-collar 4.4 4.3 4.1 4.4 4.3 4.3 4.0Service workers 4.7 4.8 4.8 5.5 4.8 4.8 3.9
By bargaining status:Union 4.3 4.6 4.5 4.8 4.6 5.2 4.8Nonunion 4.8 4.3 4.4 4.3 4.3 4.0 3.4
Memo:Wages and salaries 4.0 3.7 3.7 3.7 3.7 3.4 3.0Benefits 6.6 6.2 6.2 6.4 6.2 6.3 5.5
11-35
decline in contributions to employee pension funds between March and
June, a pattern that is unlikely to be repeated in coming quarters.
By industry, the service-producing sector accounted for
virtually all the slowdown of hourly compensation over the twelve
months ended in June (chart). The deceleration in this sector,
though widespread, was especially marked in retail trade, business
services, finance, and real estate. These industries employ
relatively large numbers of workers in white-collar and sales
occupations, which explains, in part, why increases in compensation
costs for these workers have slowed more than have the increases for
blue-collar workers. Another factor is the persistence of rapid
increases in benefits costs for workers in the goods-producing
industries, which contrasts with the slowing in the service sector.
Compensation costs in the state and local sector picked up to a
5-3/4 percent pace in the second quarter. In large part, the upturn
stemmed from the restoration of contributions to employee pension
funds by several jurisdictions that had lowered or suspended
contributions last year. Despite this rebound, hourly compensation
in the state and local sector increased only 3-1/4 percent over the
year ended in June, nearly 2 percentage points less than the
increase in the preceding year.
By bargaining status, union compensation gains in the ECI
outpaced nonunion gains by nearly 1-1/2 percentage points over the
twelve months ended in June, reversing the trend that had prevailed
for nearly a decade. Indeed, compensation increases for unionized
workers have actually picked up over the past year, as benefits
costs have accelerated and wage increases have edged down only
slightly (chart).
Separate data on new major collective bargaining agreements
also indicate little deceleration in unionized sector wages. The
II-36
Employment Cost Index
Private Industry Workers
Compensation-- - - Wages and Salaries------ Benefits
\---,
Twelve-month percent change-n 9
--4 .4 - - ----- \
IIII i i i
1987 1988 1990
Private Industry Workers
1991
I I
1992
Twelve-month percent change-- 1 9
Goods-Producing Sector- Service-Producing Sector
,- - - - - --
~- - ,.-
I I I I I I I I I L _J i1987 1988 1989 1990 1991 1992
Twelve-month percent change-- 9
Private Industry- - - - State and Local Government
-4 7
1,- N --- . 1
1N......................... ...... .
3:
I I I I I I I I I I
7
3
· ·1I I1
--
5:
1987 1988 1989 1990 1992
II-37
Compensation in Union Contracts
Unionized WorkersTwelve-month percent change
------ ECI Compensation- - - - ECI Wages and Salaries
r- ilLi1. ilI I i
1987 1988 1989 1990 1991 1992
CHANGES IN NEGOTIATED WAGE AND COMPENSATION RATESUNDER MAJOR COLLECTIVE BARGAINING SETTLEMENTS
(Percent change)
1992
Q2 partiesunder prior
1990 1991 Q1 Q2 settlements
Wage rate changes (all industries) 2
First-year adjustments 4.0 3.6 2.9 2.9 3.0Average over life of contract 3.2 3.2 3.0 3.0 3.2Workers affected (in thousands) 2,004 1,744 127 448 ---
Compensation rate changes (all industries) 3
First-year adjustments 4.6 4.1 2.5 3.8 ---Average over life of contract 3.2 3.4 3.5 3.5 ---Workers affected (in thousands) 1,278 1,155 51 184 ---
1. Estimates exclude lump-sum payments and potential gains under cost-of-living clauses.
2. Contracts covering 1,000 or more workers.3. Contracts covering 5,000 or more workers.
EFFECTIVE WAGE CHANGE IN MAJOR UNION CONTRACTS AND COMPONENTS OF CHANGE
1987 1988 1989 1990 1991 1992:Q2 1
Total effective wage change 3.1 2.6 3.2 3.5 3.6 3.3
Contribution of:New settlements .7 .7 1.2 1.3 1.1 .9Prior settlements 1.8 1.3 1.3 1.5 1.9 2.0COLAs .5 .6 .7 .7 .5 .4
1. Changes over the four quarters ended this period.
II-38
RECENT CHANGES IN CONSUMER PRICES
(Percent change; based on seasonally adjusted data)1
Relative 1991 1992 1992importance ---
Dec. 1991 1990 1991 Q4 Q1 Q2 June July
--- Annual rate------ -Monthly rate-
All items 2 100.0 6.1 3.1 3.2 3.5 2.6 .3 .1Food 16.0 5.3 1.9 2.7 1.5 -1.2 .1 -. 1Energy 7.4 18.1 -7.4 3.6 -6.9 12.5 2.0 .3All items less food
and energy 76.6 5.2 4.4 3.1 4.8 2.8 .2 .2Commodities 24.8 3.4 4.0 .6 5.3 2.1 .0 .2Services 51.9 6.0 4.6 4.3 4.8 2.9 .3 .3
Memorandum:
CPI-W3 100.0 6.1 2.8 3.3 3.0 2.7 .3 .2
1. Changes are from final month2. Official index for all urban3. Index for urban wage earners
of preceding period to final month of period indicated.consumers.and clerical workers.
RECENT CHANGES IN PRODUCER PRICES(Percent change; based on seasonally adjusted data) 1
Relative 1991 1992 1992importanceDec. 1991 1990 1991 Q4 Q1 Q2 June July
----- Annual rate------ -Monthly rate-
Finished goods 100.0 5.7 -.1 1.0 1.0 3.0 .2 .1Consumer foods 21.9 2.6 -1.5 -1.0 .3 -1.6 .2 .0Consumer energy 13.8 30.7 -9.6 -.5 -7.0 16.1 2.3 -.4Other finished goods 64.2 3.5 3.1 2.1 3.7 1.8 -.1 .2
Consumer goods 39.5 3.7 3.4 2.4 3.6 2.4 -.3 .2Capital equipment 24.7 3.4 2.5 1.9 3.5 .9 -.1 .2
Intermediate materials 2 95.3 4.6 -2.7 -1.7 .0 5.0 .7 .1
Excluding food and energy 81.7 1.9 -.8 .0 1.7 1.3 .2 .2
Crude food materials 41.2 -4.2 -5.8 -4.9 11.8 1.5 .8 -1.7
Crude energy 40.0 19.1 -16.6 5.3 -26.6 44.8 2.3 1.1
Other crude materials 18.7 .6 -7.6 -5.9 15.0 3.5 .2 1.3
1. Changes are from final month of preceding2. Excludes materials for food manufacturing
period to final month of period indicated.and animal feeds.
II-39
series on effective wage change in agreements covering 1,000 or more
workers rose 3.3 percent for the year ended in June, only
1/4 percentage point less than the increases recorded in 1990 and
1991. This measure of wage change--which includes the effects of
first-year adjustments from new settlements and the deferred
adjustments and COLAs under prior settlements--is conceptually
similar to the ECI for wages and salaries. Although first-year
adjustments in new settlements have moderated, sizable deferred
adjustments under earlier contracts have kept the effective wage
change from decelerating much.
Looking ahead, the average wage increase over the life of new
settlements signed so far this year was 3 percent, roughly the same
as the first-year adjustment. In addition, the average increase for
total compensation over the life of new settlements--available only
for those agreements covering 5,000 or more workers--was 3.5 percent
for the settlements signed during the first half of this year.
Average hourly earnings for production or nonsupervisory
workers were unchanged in July, after an increase of only
0.2 percent in June. Over the twelve months ended in July, average
hourly earnings were up 2.2 percent, about 3/4 percentage point
below the increase in the previous twelve-month period.
Prices
Recent monthly readings point to a further slowing in price
inflation, reflecting moderation in labor cost increases, continued
slack in industrial capacity, and limited upward pressure from
materials costs. Consumer prices rose only 0.1 percent in July,
after a 0.3 percent increase in June that was boosted by a short-
lived bulge in energy prices. Food prices continued to restrain
overall consumer price inflation, and prices of other goods and
services advanced only 0.2 percent in both June and July. At the
II-40Daily Spot and Posted Prices of West Texas Intermediate
Dollars per barrel
Spot
,· 1I',N ir
A81 I
fA·P
Sep Oct Nov Dec Jan Feb Mar Apr May June July Aug
1. Posted prices are evaluated as the mean of the range listed In the Wal Street Journal.
MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE
Year and Month Posted Spot
1991September 20.55 21.86October 21.96 23.23November 21.40 22.47December 18.47 19.521992January 17.63 18.82February 17.72 19.00March 17.81 18.92April 19.20 20.24May 19.90 20.94June 21.46 22.38July 20.77 21.76August 1 20.38 21.23
1.. Price through August 12.
II-41
producer level, the PPI for finished goods increased 0.2 percent in
June and 0.1 percent in July; excluding food and energy, this
measure has risen 2-1/2 percent over the past year, markedly under
its pace in the preceding few years.
The CPI for energy rose 2 percent in June and moved up a bit
further in July, as previous increases in crude oil costs reached
the retail level. However, prices of crude oil have eased, on
balance, since June, and refinery prices of petroleum products
declined in July. Private survey data suggest that retail gasoline
prices turned down in early August.
Consumer food prices were flat on balance over June and July,
and the PPI for finished foods increased only slightly over this
period. Increases in output have led to declines in the retail
prices of meats and those of fruits and vegetables in recent months,
and the average price increases for other food categories have
continued to be small. In total, the CPI for food was up only
1/2 percent over the year ended in July.
Outside of food and energy, prices of consumer goods were flat
in June and then rose 0.2 percent in July. Prices of apparel fell
in both months, owing to early markdowns on summer merchandise.
while tobacco prices partially retraced their large increase in May.
Price increases for new cars and light trucks moderated a bit, but
used car prices rose sharply for the fourth straight month. Prices
of nonenergy services rose 0.3 percent in both June and July, held
down by a relatively small increase in rents over the two months.
Airfares declined sharply in June, and then reversed about half of
this decline in July. 1 0
10. More recently, major airlines have announced substantial newdiscounts, pointing to renewed downward pressures on airfares thismonth.
II-42
INFLATION RATES EXCLUDING FOOD AND ENERGY
Percent change from twelve monthsearlier
July July July1990 1991 1992
CPI 5.0 4.8 3.7
Services 5.9 5.1 4.0
Owners' equivalent rent 6.0 3.3 3.5Tenants' rent 4.3 3.6 2.3Other renters' costs 7.2 12.1 6.1Auto finance charges -1.9 -1.8 -10.6Airline fares 11.4 3.3 -.9Medical care 9.4 8.6 7.7Entertainment 5.3 5.4 3.0
Goods 3.5 4.2 3.0excluding used cars 3.8 4.4 2.9
Alcoholic beverages 4.8 10.4 3.0New vehicles 1.4 4.5 2.4Apparel 4.9 3.5 3.2Housefurnishings 1.2 1.1 1.3Housekeeping supplies 3.5 2.4 .9Entertainment 3.8 3.4 2.3
PPI Finished goods 3.8 3.4 2.5
Consumer goods 3.9 3.6 2.9
Capital equipment, excludingmotor vehicles and computers 3.5 3.8 2.5
PPI intermediate materials .3 .4 .8
PPI crude materials 2.0 -8.9 3.4
Factors Affecting Price Inflation
ECI hourly compensation 5.2 4.4 3.7Goods-producing 5.2 4.4 4.1Service-producing 5.2 4.4 3.5
Civilian unemployment rate 2 5.4 6.8 7.7
Capacity utilization 2 83.1 78.7 77.6 3(manufacturing) 4
Inflation expectations 4.7 3.8 3.9
Non-oil import prices 5 .5 1.9 1.2Consumer goods, excluding autos,
food, and beverages 3.3 .9 3.0Autos -.8 5.6 2.0
1. Private industry workers, periods ended in June.2. End-of-period value.3. June level.4. University of Michigan Survey, twelve-month horizon.5. BLS import price index (not seasonally adjusted), periods ended
in June.
II-43
The underlying trend of inflation--as measured by the twelve-
month change in the CPI excluding food and energy--has moved down to
about 3-3/4 percent, a marked slowing from the 5 percent range
observed for the years ended in July 1990 and 1991 (table). This
slowing has been most apparent in the prices of nonenergy services,
which rose 4 percent over the latest twelve-month period, compared
with increases of about 6 percent and 5 percent, respectively,
during the years ended in July 1990 and July 1991. Moderation in
rent increases, reflecting weakness in housing markets, contributed
importantly to this deceleration. Declines in auto finance charges
and airfares also have held down the pace of services inflation this
year. In addition, prices have been rising less rapidly in some
service categories for which labor costs are important, in
particular, entertainment and medical care. The slowing in hourly
compensation gains in service-producing industries, discussed above.
likely has paved the way for some of the recent deceleration in
inflation of prices for services.
Inflation in goods prices at retail also has slowed, although
the timing and composition have been more uneven. For items other
than used cars, the CPI for goods (nonfood, nonenergy) has risen
about 3 percent over the past year, in line with the increases shown
in domestic producer prices and in import prices for these
goods.11 This CPI component had risen 4-1/2 percent during the
year ended in July 1991, boosted in part by higher federal excise
taxes (mainly on alcoholic beverages); during the preceding year,
prices for this component increased about 3-3/4 percent.
Producer prices of capital equipment also have reflected the
slowing in labor costs and excess capacity in manufacturing.
11. We have excluded used cars because their price movements, inthe short run, do not reflect current trends in labor and materialscosts.
II-44
Table 1
PRICE INDEXES FOR COMMODITIES AND MATERIALS 1
Percent change 2
1992 Memo:
Last To June 23 Yearobser- June to earlier
vation 1990 1991 23 3 date to date
1. PPI for crude materials4 July 6.0 -11.6 3.9 .2 1.8
la. Foods and feeds July -4.2 -5.8 5.6 -2.1 -.1la. Energy July 19.1 -16.6 1.5 1.1 2.3lb. Excluding food and energy July .6 -7.6 5.0 1.1 3.41c. Excluding food and energy,
seasonally adjusted July .7 -7.6 4.5 1.3 3.4
2. Commodity Research Bureau2a. Futures prices Aug. 11 -2.7 -6.5 .3 4.4 -4.22b. Industrial spot prices Aug. 10 .6 -11.3 5.3 .0 2.1
3. Journal of Commerce industrials Aug. 11 -2.4 -7.2 4.6 -.3 2.03a. Metals Aug. 11 -3.9 -7.1 4.9 2.5 4.5
4. Dow-Jones Spot Aug. 11 -1.7 -12.1 7.5 -2.6 -.2
5. IMF commodity index4 June -5.2 .7 .0 n.a. 1.95a. Metals June -1.1 -8.9 4.9 n.a. 1.75b. Nonfood agriculture June -3.5 1.3 3.3 n.a. 2.3
6. Economist (U.S. dollar index) Aug. 4 -4.4 -9.1 4.5 .1 .56a. Industrials Aug. 4 -3.2 -14.9 8.9 1.9 4.9
Not seasonally adjusted.Change is measured to end of period, fromWeek of the June Greenbook.Monthly observations. IMF index includesNot available
last observation of previous period.
items not shown separately.
Index Weights
Food Commodities
01Precious Metals
a
PPI for crude materials
CRB futures
CRB industrials
Journal of Commerce index
Dow-Jones
IMF index
Economist
41 41 1 18
14 57 14 14
100
12 88
58 17 25
55 45
50 50
1. Forest products, industrial metals, and other industrial materials.
1.2.3.4.
n.a.
Energy
OOthers'
El
II-45
Excluding motor vehicles and computers (the latter was absent from
the PPI before 1991), the PPI for capital equipment was up only
2-1/2 percent during the year ended in July, well under the pace
registered during the preceding two years.
Spot measures of industrial commodity prices, such as the
Journal of Commerce index, have risen on net so far in 1992.
Although broad indexes of these prices have changed relatively
little since the last Greenbook, the prices of several nonferrous
metals have moved up further. In contrast, the CRB futures index
has fallen sharply during the intermeeting period, mainly because of
declines in the prices of agricultural crops.
The declines in crop prices have been driven by the marked
improvement in U.S. crop conditions since midyear. The Department
of Agriculture's latest output projections, which are based on
conditions as of August 1, show corn production up 17 percent this
year, to a near-record level of 8.8 billion bushels. Soybean output
is expected to rise 5 percent this year, and production of spring
wheat is expected to attain a new high. The production of cotton,
though likely to be down from that of last year, will be larger than
in other recent years. Because of the cool summer, however,
development of the crops is lagging, and they may be more vulnerable
than usual to the threat of early frost. In addition, the prospects
for grain production elsewhere in the world have declined since
midyear, according to the USDA's latest assessment.
II-46
COMMODITY PRICE MEASURES *
-- Journal of Commerce Index, total- - Journal of Commerce Index, metals
Ratio scale, index(1980=100)
Total102101
98
95Jul Aug1992
Metals106105
102
99Jul Aug1992
CRB Spot Industrials
Ratio scale, index(1967=100)
1984 1985 1986 1987 1988 1989 1990
CRB Futures
Ratio scale, index(1967=100)
I I 1 91992 199:
* Weekly data, Tuesdays; Journal of Commerce data monthly before 1985
290 CRB Futures 2 12
210270
250 204
230 198Jul Aug1992
210
1903
Dotted lines indicate week oflast Greenbook.
CRB Industrials
DOMESTIC FINANCIALDEVELOPMENTS
III-T-1 1SELECTED FINANCIAL MARKET QUOTATIONS
(percent)
1992 1992 1992 Change from:1992 1992 1992 Change from:D e c- -- -----. ---. ----.- --. -------------C- -----Dec-Jan FOMCLows Jul 1 Jul 2 Aug 12
Short-term rates
Dec-Jan FOMCLows Jul 1 Jul 2
---------------..------
Federal funds 2
Treasury bills 3
3-month6-month1-year
Commercial paper1-month3-month
Large negotiable CDs3
1-month3-month6-month
Eurodollar1-month3-month
deposits 4
Bank prime rate
3.94
3.723.763.81
4.013.94
3.953.893.89
3.943.88
6.50
3.56 3.56 3.24
3.553.633.87
3.243.343.55
-. 70 -. 32
3.123.203.30
-.60-.56-.51
3.89 3.53 3.353.88 3.56 3.36
3.803.823.97
3.553.553.67
-. 43 -. 12-.43 -.14-.57 -.25
-.66 -.54 -.18-.58 -.52 -.20
3.273.283.35
-.68-.61-.54
3.81 3.75 3.253.81 3.75 3.31
6.50 6.00 6.00
-. 53-. 54-. 62
-. 28- .27-. 32
-.69 -.56 -.50-.57 -.50 -.44
-. 50 -. 50
Intermediate- and long-term rates
U.S. Treasury (constant3-year10-year30-year
Municipal revenue(Bond Buyer)
Corporate--A utilityrecently offered
Home mortgage rates 6
FELMC 30-vr. FRMFHLMC 1-yr. ARM
maturity)5.056.717.39
6.53
8.46
8.235.79
5.387.107.76
5.156.937.63
4.716.487.33
-.34-.23-.06
6.58 6.55 6.24
8.55 8.55 8.09
8.43 8.43 8.065.78 5.78 5.30
-.67 -.44-.62 -.45-.43 -.30
-.29 -.34 -.31
-.37 -.46 -.46
-.17 -.37 -.37-.49 -.48 -.48
1989 1992 Percent change from:
Record Lows FOMC Record 1989 FOMChighs Date Jan 3 Jul 1 Aug 12 highs lews Jul 1
Stock prices
Dow-Jones Industrial 3413.21 6/1/92 2144.64 3354.10 3320.83 -2.71 54.84 -.99NYSE Composite 233.66 8/3/92 154.00 226.75 229.99 -1.37 49.34 1.43AMEX Composite 418.99 2/12/92 305.24 383.01 386.46 -7.76 26.61 .90NASDAQ (OTC) 644.92 2/12/92. 378.56 568.99 570.85 -11.49 50.80 .33Wilshire 4121.28 1/15/92 2718.59 3971.45 4025.31 -2.33 48.07 1.36
I/ One-day quotes except as noted.2/ Average for two-week reserve maintenance period
closest to date shown. Last observation is averageto date for maintenance'period ending August 19, 1992.
3/ Secondary market.4/ Bid rate. for Eurodollar
deposits at 11 a.m. London time.5/ Based on one-day Thursday quotes
and futures market index changes.6/ Quotes for week ending
Friday previous to date shown.
Selected Interest Rates*
1989 1990 1991 1992
"1a Pri F Rnm tod
Fads*l FUndf
6' 7 79 /211992
&30 7/9 7/211992
7/31 &812Prcernt
) 1
7/31 8121989 1990 1991 1992
*Friday weeks are plotted through August 7, statement weeks through August 5.
DOMESTIC FINANCIAL DEVELOPMENTS
Bond markets rallied over the intermeeting period in the wake
of the July 2 cut in the discount rate and incoming information
pointing to a hesitant recovery and improved disinflationary
prospects. On July 2, money market interest rates declined about 30
basis points in response to the 1/2 percentage point reduction in
the discount rate and the associated drop in the federal funds rate.
Over the entire intermeeting period short-term interest rates fell
40 to 60 basis points. Treasury coupon yields are down by
comparable amounts with the largest declines in the three- to ten-
year maturities. Mortgage rates also are down appreciably over the
period, although recent declines in bond yields have not passed
through fully to fixed-rate mortgages, mostly because a surge in
refinancing activity has heightened investor concern about
prepayment risk. The discount rate cut prompted banks to lower the
prime rate by an equal amount, but the spread over funding costs
remains wide and lending standards evidently have not softened.
Meanwhile, broad indexes of stock prices have edged up, supported by
the declines in interest rates.
Falling long-term interest rates have sparked activity in
capital markets, though much has been associated with refinancing
higher cost debt. Businesses--including below-investment grade
firms--have been tapping the public bond markets in volume, with the
proceeds mostly covering bond calls and the paydown of bank loans
and commercial paper. The more favorable climate for bond offerings
and a less attractive market for IPOs have slowed deleveraging
activity. Households, too, evidently have rushed recently to take
advantage of the decline in mortgage rates, although this has yet to
show up in closings, and net mortgage originations have been slow.
Consumer credit declined again in June and weakness likely extended
III-1
111-2
MONETARY AGGREGATES(based on seasonally adjusted data unless otherwise noted)
Growth1992 1992 1992 1992 1992 Q4 91-
1991 1 1 Q2 May Jun Jul p Jul 92p
------------ Percent change at annual rates---------------------
16.5 9.8 14.64.3 0.0 0.52.2 -1.9 -0.7
------------ Percent change at annual
-3.1 11.6 11.9-3.8 -1.3 1.1-4.4 -1.8 -0.5
Levelsrates------------ bil. $
Jul 92p
Selected components
4. Ml-A
5. Currency6. Demand deposits
7. Other checkable deposits
8. M2 minus M12
9. Overnight RPs and Eurodollars, NSA10. General purpose and broker/dealer money
market mutual fund shares11. Commercial banks12. Savings deposits (including MMDAs)13. Small time deposits14. Thrift institutions15. Savings deposits (including MMDAs)16. Small time deposits
17. M3 minus M23
18. Large time deposits19. At commercial banks, net
4
20. At thrift institutions21. Institution-only money market
mutual fund shares22. Term RPs, NSA23. Term Eurodollars, NSA
MEMORANDA:5
24. Managed liabilities at commercialbanks (25+26)
25. Large time deposits, gross26. Nondeposit funds27. Net due to related foreign
institutions28. Other6
29. U.S. government deposits at commercialbanks7
5.6 14.9 9.1 10.1 -5.4 14.7 602.4
8.4 7.4 5.8 4.8 6.6 11.7 278.93.4 22.2 12.5 15.0 -15.6 17.7 315.6
12.4 19.2 11.0 22.3 0.7 6.7 358.7
1.1 0.0 -3.7 -4.8 -4.0 -6.2 2493.9
-7.9 15.4 -35.5 -66.1 26.9 -8.8 67.9
3.97.113.3
1.1-6.99.3
-16.8
1.00.919.2
-18.9-3.622.4
-24.2
-7.30.412.0-13.3-6.618.9-29.1
3.0-3.17.8
-16.7-2.918.8
-24.0
-5.7-3.84.7
-14.6-6.35.2
-17.8
-11.9-2.19.5
-16.8-7.35.2
-20.1
349.81259.8716.3543.6816.2418.0398.2
-5.6 -7.3 -10.5 -6.4 -7.5 -4.3 696.9
-11.7
-5.1-31.7
33.4-21.7-11.0
-20.4-18.2-29.6
27.0-6.0
-27.1
-18.6-14.4-37.0
20.1-5.0-24.1
-14.2-8.0
-40.7
35.5-11.6-50.2
-14.1-12.0-25.2
30.2-26.8-31.9
-19.4-22.1-6.9
48.1-48.0-25.7
----- Average monthly change in billions of dollars----
-0.6 -2.8 -2.6 -2.6 -1.0 -4.5-0.2 -5.7 -4.8 -3.2 -4.3 -6.6-0.5 2.8 2.3 0.6 3.3 2.1
389.8320.4
69.4
207.767.250.2
684.0385.8298.2
0.4 2.1 5.2 5.2 5.9 1.6 62.8
-0.9 0.7 -3.0 -4.5 -2.8 0.6 235.4
0.2 -1.5 1.3 -2.9 8.8 -3.7 22.1
1. Amounts shown are from fourth quarter to fourth quarter.2. Nontransactions M2 is seasonally adjusted as a whole.3. The non-HZ component of M3 is seasonally adjusted as a whole.4. Net of large denomination time deposits held by money market mutual funds and thrift institutions.5. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis.6. Consists of borrowing from other than commercial banks in the form of federal funds purchased, securities
sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from 'Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estil
7. Consists of Treasury demand deposits and note balances at commercial banks.p - preliminary
1. Ml2. M23. M3
III-3
into July, judging from data on consumer loans at banks. State and
local governments also have been availing themselves of reduced bond
rates by large refunding offerings. Finally, while the RTC has been
dormant, federal borrowing has remained strong in recent months
owing to persistently large deficits.
With credit demands concentrated in longer-term markets, bank
credit was about flat, and the broad monetary aggregates declined
further in July. Ml rebounded, but households continued to draw
down their M2 balances and to limit increases in debt, as well as to
take advantage of the higher yields available on capital market
instruments. This process has been aided by aggressive cuts in
retail deposit rates by banks as their loans continued to contract.
Monetary Aggregates and Bank Credit
M2 is estimated to have fallen at a 1-1/4 percent annual rate
in July, despite the further decline in short-term market interest
rates, which boosted liquid deposits. M3, posting its fifth
consecutive monthly decline, fell at a 1-3/4 percent annual pace.
Both broad aggregates lie well below their annual target ranges.
Growth in retail deposits in July was moderated by sharp cuts
in deposit interest rates, likely motivated by a surfeit of retail
deposits in relation to weak lending. In addition, however, it is
possible that deposit rates are being pulled down by newly effective
provisions of the FDIC Improvement Act (FDICIA), which, beginning in
mid-June, impose ceilings on deposit rates that can be offered by
institutions that are not well capitalized. Further, FDICIA
restrictions that preclude inadequately capitalized institutions
from issuing brokered deposits may have contributed to the
contraction of retail time deposits over June and July. Finally,
the steepness of the yield curve continued to play a prominent role
III-4
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT 1(Percentage change at annual rate, based on seasonally adjusted data)
Dec.1990to
Dec.Category 1991
1992 1992Ql Q2
1992 1992 1992May. Jun. Jul. p
1. Total loansand securitiesat banks
2. Securities
3. U.S. government
4. Other
5. Loans
6. Business
7. Real estate
8. Consumer
9. Security
10. Other
Commercial bank credit
3.9
17.6
23.8
1.4
-0.2
-2.8
2.9
-3.9
21.6
-2.7
2.1
6.6
11.1
-7.7
0.5
-6.4
2.6
-0.9
45.4
3.0
2.1
14.6
19.5
-2.1
-2.4
-7.2
0.5
-2.2
24.3
-8.9
-0.8
11.8
15.6
-0.7
-5.5
-7.3
1.1
-5.0
60.5
-11.5
1.8
11.2
17.6
-11.0
-1.8
-8.2
-1.4
1.3
44.4
-3.9
-0.2
14.5
14.6
13.9
-5.6
-5.0
-2.6
-1.3
-67.0
-9.1
11. Business loansnet ofbankers acceptances
12. Loans at foreignbranches 2
13. Sum of lines 11 and 12
14. Commercial paperissued bynonfinancial firms
15. Sum of lines 13 and 14
16. Bankers acceptances,U.S. trade-related 3
17. Finance companyloans to business 4
18. Total (sum oflines 15, 16,and 17)
Short- and intermediate-term business credit
-2.5 -6.7 -7.0 -7.8 -7.2 -6.5
-1.6
-2.4
-10.4
-3.9
-40.9
-8.0
14.9
-4.0
26.3
-5.7
-3.9
-5.4
-5.3
-7.7
-12.7
-8.6
84.6
-3.7
6.0
-1.9
44.4
-4.7
-5.1
-4.8
-16.2 -22.9 -27.3 -27.7 -37.8 n.a.
1.4 -1.9 -1.5 0.0 5.6 n.a.
-2.9 -3.9 -4.9 -6.7 -0.9 n.a.
1. Average of Wednesdays. Data are adjusted for breaks caused by reclassifications.2. Loans at foreign branches are loans made to U.S. firms by foreign branches of
domestically chartered banks.3. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic
shipment and storage of goods. Based on average of data for current and precedingends of month.4. Based on average of data for current and preceding ends of month.5. June 1992 data.p--Preliminary.n.a.--Not available.
Level(billions
ofdollars)1992Jul. p
2,869.3
789.3
614.8
174.5
2,080.0
596.6
878.7
359.6
60.9
184.2
589.6
25.2
614.8
139.8
754.6
24.65
298.85
1,080.95
III-5
in drawing-balances from M2 to higher yielding capital market
instruments.
Incentives for shifting out the yield curve were manifested in
the July contraction in M2-type money funds. Typically, these funds
are boosted by declining market rates, because their yields lag
behind. But last month investors apparently eschewed the temporary
yield differential favoring money funds, and instead continued to
seek returns posted at the long end of the yield curve. Net flows
into stock and bond mutual funds totalled $17 billion in June, and
anecdotal reports indicate an even larger volume in July. Some
banks are encouraging their depositors to transfer balances to stock
and bond funds with which the banks have management or service
contracts.
In contrast to the behavior of M2-type money funds,
institution-only money funds saw stronger inflows in July in
response to the decline in short-term market rates. Like M2-type
money funds, institution-only money funds typically see temporary
gains from declining market rates. However, investors in
institution-only money funds are motivated primarily by cash
management needs and thus may be less willing to shift out the yield
curve into capital market instruments. With depositories facing
weak credit demands, runoffs of large time deposits accelerated in
July, thus providing some offset in M3 to the acceleration in
institution-only money funds. On balance, the non-M2 component of
M3 declined in July, but less rapidly than the previous month.
Bank credit was about unchanged in July, with a decline in
loans offset by a modest pickup in securities acquisitions. In
part, the rise in securities acquisitions reflected the issuance of
warrants, which the state of California is using as a stop-gap
Loans at Weekly Reporting Banks Selected by Capital Status *(Growth from year-earlier month)
Percent-i 30
Under Capitalized **
*.... Adequately Capitalized
1989 1990 1991
* C al status is determined as of the Call Report for 3/31/92.** Ir, -s undercapitalized, significantly undercapitalized, and c. Ily undercapitalized banks.
1992
III-7
source of payment to creditors until it can pass a 1993 budget. 1
Business loans continued to shrink, although at a somewhat slower
pace than in recent months because of a pickup at branches and
agencies of foreign banks. That rise was concentrated at European
and Canadian institutions, who have had relatively comfortable
capital positions, while loans at Japanese branches and agencies
remained flat. Consumer loans fell in July, but after adjusting for
securitizations, grew at a 3 percent annual rate. Real estate loans
contracted for the second straight month; anecdotal evidence points
to loan sales and securitizations as key reasons for the weakness,
chargeoffs in excess of seasonal norms also may be a factor.
Results of the August Senior Loan Officer Opinion Survey were
consistent with the view that weak loan demand is the primary factor
behind weak loan growth at banks. Although roughly 12 percent of
respondents reported a pickup in loan demand over the last three
months, about 17 percent reported that demand weakened. The vast
majority of respondents indicated no change in underwriting
standards since the May survey and various lending terms were
reported as unchanged in contrast to earlier surveys, which had
indicated some tightening.
Declines in loans have occurred throughout the year at banks
with widely varying capital positions, suggesting that weak credit
demands have played a role. Recently, though, disparities have
become more pronounced between loan growth at under-capitalized
banks and those with stronger capital positions, perhaps indicating
that better capitalized banks are becoming poised for renewed loan
growth. On a year-over-year basis, weekly reporting banks that are
1. In July, depositories accepted nearly $2 billion of thesewarrants from creditors of the state of California. The effect, ona month average basis, was to boost securities acquisitions in Julyby some $800 million. To date, none of the California warrants hasbeen redeemed.
III-8
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS(Monthly rates, not seasonally adjusted, billions of dollars)
-----------------1992-------- ---- ----
1990 1991 Q1 Q2P May p Junep JulyP
Corporate securities - totall 19.82 32.15 40.97 41.28 46.42 48.36 44.69Public offerings in U.S. 17.68 29.36 37.63 38.01 42.42 44.40 42.48
Stocks--total 2 1.95 5.44 7.53 7.08 6.92 9.00 6.48Nonfinancial 1.03 3.72 5.14 4.99 5.59 5.74 3.02
Utility .35 .42 .79 1.24 1.08 1.67 .56Industrial .68 3.30 4.35 3.75 4.51 4.07 2.46
Financial .92 1.72 2.38 2.09 1.32 3.25 3.46
Bonds 15.73 23.92 30.10 30.93 35.50 35.40 36.00Nonfinancial 5.62 9.52 13.41 12.34 12.50 13.50 19.00
Utility 1.98 2.96 4.98 5.45 5.30 6.20 9.40Industrial 3.64 6.56 8.43 6.89 7.20 7.30 9.60
Financial 10.11 14.40 16.69 18.59 23.00 21.90 17.00
By quality 3
Aaa and Aa 3.42 3.72 4.13 2.88 4.20 2.75 6.45A and Baa 6.44 12.09 15.81 15.04 15.11 16.95 16.45Less than Baa .15 1.03 2.64 3.31 3.10 4.12 4.13No rating (or unknown) .04 .02 .10 .02 .01 .02 .03
Memo items:
Equity-based bonds4 .40 .63 1.01 .52 .55 .74 .16Mortgage-backed bonds 2.43 2.99 4.83 6.41 7.13 8.14 5.00Other asset-backed 3.27 4.08 2.63 3.26 5.95 3.42 3.94Variable-rate notes .80 .84 .90 2.14 2.92 2.41 .30
Bonds sold abroad - total 1.92 2.33 2.61 2.48 2.97 3.10 2.00Nonfinancial .46 1.00 .96 1.06 1.13 1.85 .80Financial 1.46 1.33 1.64 1.42 1.84 1.25 1.20
Stocks sold abroad - total .22 .46 .74 .79 1.04 .86 .21Nonfinancial .10 .38 .53 .67 1.02 .66 .09Financial .12 .08 .21 .12 .01 .21 .12
1. Securities issued in the private placement market are not included. Total reflectsgross proceeds rather than par value or original discount Donds.2. Excludes equity issues associated with equity-for-equity swaps that
in restructurings. Such swaps totaled $9.4 billion in 1990.3. Bonds categorized according to Moody's bond ratings, or to Standard
unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.4. Includes bonds convertible into equity and bonds with warrants that
holder to purchase equity in the future.p--preliminary.
have occurred
and Poor's if
entitle the
III-9
well capitalized under FDICIA are now seeing slower runoffs than in
recent months (chart). Adequately capitalized banks are running off
loans at about the same rate as earlier this year, but runoffs in
loans at under-capitalized banks have accelerated, especially over
the last few months.
Business Finance
Corporate bond yields fell in July to their lowest levels since
the early 1970s, prompting nonfinancial corporations to bring to
market a record $19 billion of public bond offerings. A large
portion of the bonds issued in July were earmarked for replacing
existing higher cost debt. For example, a number of firms called
bonds issued in the 1960s and early 1970s and simultaneously offered
new debt. In addition, some portion undoubtedly was used to pay
down short-term obligations, thereby contributing to the weakness in
short-term business credit last month.
Adding to July's strong bond issuance was heavy junk bond
issuance. As in the first half of the year, most of last month's
junk bond issues were dedicated to refinancing higher cost bank debt
and bonds. However, unlike earlier this year and in 1991, many of
the firms issuing junk bonds did so without also accessing the
public equity market. Equity investors have become more selective,
causing several proposed reverse LBOs--including those of Dr. Pepper
and Revlon--to be postponed or cancelled.
A reduced pace of reverse LBOs contributed to an overall
slowing in public equity offerings by nonfinancial corporations.
Besides reverse LBOs, other initial public offerings (IPOs)
weakened, as investors were soured by the poor performance of recent
IPOs in the subsequent secondary market. Furthermore, July saw only
a smattering of large offerings by established companies, which had
bolstered issuance in previous months. Indeed, only General Motors
Gross Interest Payments to Cash Flow*Percent
1970 1972 1974 1976 1978
*Economic profits before taxes plus gross interest payments and depreciation
1980 1982 1984 1986 1988 1990 1992
III-ll
and Freeport-McMoran, with preferred offerings, came to the public
market in any significant size in July. A large, private issue of
preferred stock by Unocal offset, to some extent, the slowdown in
public issuance. The volume of public offerings picked up somewhat
in the first week of August, pointing toward a stronger month than
July.
After languishing throughout most of July, major stock price
indexes rebounded sharply in the last few days of July with the fall
in long-term interest rates. Stock prices have since backed off, as
worries about the economic outlook returned to the forefront. On
balance, the broader indexes are up 1/2 to 1-1/2 percent since the
last FOMC meeting.
Other incoming signals of the health of businesses were
generally positive. Bond defaults in the first half of this year
ran at a 5 percent annual rate, down from the 10 percent level of
the past two years. Furthermore, during the second quarter, the
number of downgraded firms dropped to its lowest level since the
third quarter of 1988, and upgrades maintained their slow upward
march. Falling rates have eased the interest payment burdens of
firms; interest expense as a share of business cash flow now stands
at a level last seen in the mid-1980s (chart). Finally, business
failures fell slightly in the first quarter of 1992, though they
remain at a high level.
The financial strength of U.S. commercial banks continued to
improve during the second quarter, but areas of concern remain.
Profits grew as further declines in interest rates boosted net
interest margins. Loan credit quality also improved; nonperforming
loans at nineteen of the top twenty-five banking organizations
declined as a percent of total assets.
III-12
TREASURY AND AGENCY FINANCING 1(Total for period; billions of dollars)
1992
Q2 Q3p July Aug.p Sept.p
Treasury financing
Total surplus/deficit (-)
Means of financing deficit:
Net cash borrowingfrom the public
Marketable borrowings/repayments (-)
BillsCoupons
Nonmarketable
Decrease in the cash
balance
Memo: Cash balanceat end of period
2
Other
Federally sponsored creditagencies, net cash
borrowing 3
FHLBs
FHLMC4
FNMAFarm Credit BanksSLMA
FAMC5
-28.4
62.5
52.82.4
50.49.7
-27.2
47.0
-6.9
-81.6 -41.1 -34.5
76.6
78.921.257.7-2.3
2,6
44.4
2.4
28.6 37.2 10.8
32.914.118.8-4.3
9.5
37.5
3.0
35.74.6
31.11.5
2.0
35.5
-4.7
10.22.47.8.6
-8.9
44.4
4.2
8.1
.5
2.57.7-.8
-1.2
.5
1. Data reported on a not seasonally adjusted, payment basis.2. Includes checks issued less checks paid, accrued items and other
transactions.3. Excludes mortgage pass-through securities issued by FNMA and FHLMC.4. Data for April and May only.5. Federal Agricultural mortgage Corporation.p--projected.Note: Details may not add to totals due to rounding.
-6.0
TREASURY AND AGENCY FINANCING!
(Total for period: billions of dollars)1992
Q2 Q3 p July Aug.p Sept. p
III-13
As capital markets warmed to banks earlier this year, they
issued a large volume of both equity and debt. Banks already have
raised about the same amount of equity funds as they raised in all
of 1991. Even in July. when the performance of bank shares was
relatively weak, equity issuance by banks continued unabated. Banks
have responded to the sharp decline in spreads on bank debt this
year by issuing debt at a pace ahead of last year's record. The
need to bolster capital ratios in order to pursue acquisitions and
access to the brokered CD market likely have been two factors
spurring banks to tap the subordinated debt and equity markets.
Treasury and Sponsored Agency Financing
The projected third quarter deficit of $82 billion will likely
be financed by $77 billion of marketable borrowing, leaving the
Treasury's cash balance little changed on the quarter. A projected
$14 billion increase in marketable borrowing during the third
quarter largely reflects a seasonal bounceback from a second quarter
level of borrowing that had been depressed by paydowns of large cash
management bills following the April tax season. Gross weekly bill
auctions are expected to be unchanged over the third quarter, while
gross coupon auction sizes are likely to be unchanged to up $250
million. The $4.15 trillion debt ceiling affords the Treasury about
$225 billion of room for new issuance. The staff anticipates that
the debt ceiling will be reached around the end of the first quarter
of 1993.
Three sources of uncertainty about Treasury issuance plans have
been the focus of market participants' attention over the
intermeeting period. First, ambiguous comments by Treasury
officials renewed speculation that the Treasury would scale back its
long-term debt issuance, shortening its average maturity to take
advantage of the steep yield curve and perhaps to encourage some
III-14
decline in long-term rates. In the event, the Treasury announced
that the composition and total amount of its midquarter refunding
would be unchanged from the previous two refundings; bond yields
backed up slightly on the announcement. Second, debt restructuring
agreements by Argentina and Brazil left open the possibility that
those governments would be large net purchasers in the market of
long-dated Treasury zero-coupon securities. As yet, they have not
appeared in the market. Third, Treasury officials reported that a
decision on the setup of an experiment with single-price auction
awards would be made within the next two months, but trials with
more involved iterative auctions may be several years away.
Municipal Securities
Over the intermeeting period, the ratio of tax-exempt to
taxable bond yields dropped to its lowest level since the enactment
of the Tax Reform Act of 1986.2 Since the end of last year, the
ratio has moved steadily downward, as the result of both strong
household demand for tax-exempt securities and weak net issuance by
state and local governments. The downward movement in the ratio
accelerated in July with an unusually large volume of bond
redemptions, which are estimated to have amounted to about 1 percent
of the outstanding stock of municipal bonds. The ratio should
continue to face downward pressure, as the volume of redemptions
will remain heavy over the course of the year. The high level of
redemptions reflects bonds issued in 1982 that had since been pre-
funded. Market analysts expect the volume of redemptions in the
third quarter to total about $20 billion, nearly equal to the entire
amount in 1991.
2. On an after-tax basis, the relative attractiveness of tax-exempt bonds decreased with the reduction in marginal tax rates inthe Act.
III-15
GROSS OFFERINGS OF MUNICIPAL SECURITIES(Monthly rates, not seasonally adjusted, billions of dollars)
1991 1992 1992
1990 1991 Q4 Q1 Q2 May June July p
Total offerings 1 13.49 16.60 17.00 16.37 21.04 14.85 29.30 18.39
Total tax-exempt 13.24 16.18 16.59 15.82 20.29 14.50 28.54 18.30Long-term 2 10.26 12.84 14.96 14.20 16.60 14.16 20.50 15.91
Refundings 1.68 3.11 3.47 5.12 5.81 4.90 6.41 7.53New capital 8.58 9.73 11.49 9.08 10.79 9.26 14.09 8.38
Short-term 2.98 3.34 1.63 1.62 3.69 .34 8.04 2.39Total taxable .25 .42 .41 .55 .75 .35 .76 .09
p--preliminary1. Includes issues for public and private purposes.2. Includes all refunding bonds, not just advance refundings.
Changes in long-term debt ratings in the second quarter present
a mixed picture of the credit quality trend in the municipal sector.
Standard & Poor's upgraded 25 more issues than it downgraded;
however, most of its upgrades owed to improved ratings for two large
utilities. Moody's upgraded about the same number of issues that it
downgraded.
The credit ratings of two major states, California and
Illinois, have been lowered in the past month. Standard & Poor's
and Moody's both downgraded the state of California, primarily
because the inability of the legislature and state administration to
come to agreement on a budget for fiscal year 1993, which began on
July 1. As a result, California has been forced to pay most
creditors, including state employees, with registered warrants.
Although local banks were accepting these warrants for deposit in
July, several of the largest banks recently have announced that they
will no longer accept them, portending a possible disruption of
state government operations. Standard & Poor's dropped Illinois'
3. Moody's cut the rating on California general obligation bondsfrom Aal to Aa. Standard & Poor's followed shortly thereafter witha rating cut to A+ from AA. California had been rated AAA by bothissuers until near the end of 1991, when the state's budget processbegan to unravel.
III-16
STANDARD AND POOR'S MUNICIPAL LONG-TERM DEBT RATING ACTIONS(Number of rating revisions by region)
Region 1985 1986 1987 1988 1989 1990 1991 1992:1 1992:2
WestUpDown
SouthwestUpDown
NorthwestUpDown
MidwestUpDown
SoutheastUpDown
NortheastUpDown
8674
1955
89
18862
3067
3129
22251
2255
187
2196
3666
26132
617
56
33
820
121111
793
362 154 114 170296 269 185 138
140 145465 607
Memo: Volume (billionsUp n.a.Down n.a.
of dollars)38.9 17.011.6 25.0
18.0 13.4 18.8 8.1 6.1 7.722.6 24.0 47.8 51.5 20.5 2.3
Source: Standard and Poor's Credit Week
TotalUpDown
101106
150145
1. Of these upgrades, 88 represent Kentucky school districts that wereas a result of state-implemented funding reforms.
upgraded
III-17
rating from AA to AA- last month, pointing to a $1 billion deficit
in the 1992 operating budget and the prospect of another budget
deficit in fiscal 1993. Moody's also is considering downgrading
Illinois.
Mortgage Markets
Over the intermeeting period, interest rates on conventional
fixed-rate mortgages declined by nearly 40 basis points to 8.06
percent, with the bulk of the decline occurring before mid-July.
Since that time, mortgage rates have not moved down with rates on
Treasury coupons owing to concerns about prepayment risk. This
decline in mortgage interest rates has prompted a resurgence of
mortgage refinancings. The Mortgage Bankers Association's weekly
index of refinancing activity (nsa) spiked in July--to a level close
to that recorded in January--before easing slightly in early August
(chart). A Freddie Mac index, based on a broader survey of mortgage
lenders, also indicates that the proportion of refinancing
applications rose markedly in July.
The latest MBA data indicate that just over one-half of total
mortgage applications at mortgage banking companies have been to
refinance outstanding mortgages. Anecdotal reports from mortgage
bankers also suggest that the current "fallout" rate on new
applications is lower than in January, with the bulk of applications
4leading to contract closings. The recent decline in interest
rates on both fixed and adjustable rate mortgages, plus the
resulting higher levels of refinancing activity, have raised staff
4. In January, lenders reported that many borrowers, expectingfurther declines in mortgage rates, were submitting applications atmore than one lender without locking in a rate. When mortgage ratesunexpectedly increased, borrowers did not take their applications toclosing. Lenders refer to the proportion of applications that donot lead to a loan as the fallout rate. Following the disappointingexperience of borrowers earlier in the year, lenders now report thatborrowers are locking in available rates more quickly, resulting ina lower fallout rate and preventing--at least temporarily--origination bottlenecks at mortgage lenders.
III-18
Refinancing Indexes (N.S.A.)
Percent of Originations
Monthly
- FHLMC Refinancing Volume (left scale)
1990 1991
Source: Mortgage Bankers Association; Federal Home Loan Mortgage Corporation.
FRM to ARM Spread vs. One-Year ARM Discount
March 16, 1990= 100
1992
Percent
Monthly
One-Year ARM Discount
S\ ARM to FRM Spread
II I i i I I i I I I1989
Source: Federal National Mortgage Association.
1990 1991 1992
2000
1750
1500
1250
1000
750
500
250
0
4.2
3.6
III-19
estimates of mortgage interest savings for households. Owing to the
cumulative refinancing of FRMs and resetting of ARMs in 1991 and
1992, total interest savings at an annual rate (not adjusting for
closing costs) are estimated to be about $18.5 billion in 1992 and
$25 billion in 1993, assuming no further change in rates.
Prices of mortgage securities in the secondary market, too,
have weakened relative to prices of comparable maturity Treasuries
owing to greater prepayment premiums. In particular, yield spreads
on current coupon agency pass-throughs have widened about 20 to 25
basis points since mid-July. Investors' concerns in the secondary
market have been most apparent in the interest-only (IO) mortgage
strips sector, where prices have dropped by 20 percent to 30 percent
or more since the beginning of July. 10 prices are particularly
sensitive to accelerating mortgage prepayments because the value of
IO cash flows depends almost entirely on how long the mortgage loans
are outstanding.
The spread between interest rates on thirty-year, fixed-rate
mortgages (FRMs) and initial rates on adjustable-rate mortgages
(ARMs) remains above 250 basis points, but has narrowed slightly
since the beginning of the year, as long-term Treasury rates have
declined and lenders have reduced discounts offered on ARM start
rates (chart). With the near-record interest rate spread between
ARMs and fixed-rate mortgages, the origination volume of ARMs has
picked up in recent months, although their share of total
originations remained relatively small. According to Fannie Mae,
the share of thirty-year fixed-rate mortgages stabilized around
50 percent in May and June, as the rise in the proportion of
fifteen-year, fixed-rate mortgages halted.
The available data for mortgage credit indicate that growth
remained weak in recent months. Real estate loans at commercial
III-20
MORTGAGE-BACKED SECURITY ISSUANCE(Monthly averages, billions of dollars, NSA unless noted)
Federally relatedpass-through securities Multiclass securities
Total Fixed- ARM- Private FNMA FHLMC Agency(SA) Rate backed Total issues REMICs REMICS strips
1988 12.4 10.2 2.3 6.8 5.0 .9 .9 n.a.1989 16.5 14.1 2.7 8.4 1.6 3.1 3.2 .31990 19.7 17.2 2.4 11.5 2.4 5.1 3.4 .61991 22.2 20.4 2.0 18.4 3.0 8.5 6.0 .9
1991-Q3 24.5 23.7 2.0 22.6 3.6 10.4 7.1 1.5Q4 22.6 22.4 2.5 23.5 2.9 11.2 7.3 2.1
1992-Q1 35.1 29.1 2.0 23.5 4.8 11.1 7.0 .6Q2 p 42.2 36.7 3.6 33.2 5.4 14.4 12.4 1.0
1992-Jan. 32.8 25.4 1.5 20.3 4.7 11.0 4.1 .5Feb. 33.9 28.6 1.7 17.6 5.5 7.3 4.2 .6Mar. 38.6 33.4 2.8 32.1 4.2 14.8 12.5 .6Apr. r 44.3 37.0 3.0 24.8 3.9 9.2 11.7 .0May r 47.5 39.6 4.0 39.9 7.1 19.1 13.0 .7June p 34.6 33.5 3.8 34.9 5.3 14.8 12.6 2.2
1. Excludes pass-through securities with senior/subordinated structures.p--preliminary r--revised n.a.--not available
III-21
banks rose at only a 1/2 percent pace in the second quarter, and, as
noted above, declined in July. Gross issuance of federal agency
pass-throughs declined to a seasonally adjusted $34.6 billion in
June, down from May's record pace of $47.5 billion (table). Net
issuance, while rising in the second quarter, remained at a low
level owing to the sluggish housing market.
Gross agency MBS issuance in the first half of 1992 was 85
percent ahead of the same period last year. Moreover, offerings of
private-label mortgage securities in the first half of 1992 exceeded
levels in last year's first half by 120 percent, owing partly to
increased sales by the RTC. Part of the rise represented stronger
issuance of adjustable-rate pass-throughs, which was up 135 percent
for agency securities and 100 percent for private-label issues
compared to the same period last year. At the half-way mark, it
appears that both pass-through and CMO offerings for the agency and
private-label sectors will set new records in 1992, despite somewhat
subdued mortgage originations, as securitizations account for a
still greater share of financings.
Consumer Credit
Consumer installment credit outstanding contracted at a
1-3/4 percent seasonally adjusted annual rate in June, following
declines of 6 percent and 1-1/2 percent in April and May,
respectively. The decline was concentrated in auto credit, which
fell sharply in June. Revolving credit grew at a 4-1/4 percent rate
in June, somewhat faster than the pace of the previous two months,
but still well below even the reduced pace of 1991. For the second
quarter as a whole, consumer installment credit declined at a 3
percent annual rate, the steepest quarterly drop since the second
quarter of 1980.
III-22
CONSUMER CREDIT(Seasonally adjusted)
Memo:Percent change Outstandings(at annual rate) (billions of
dollars)1992 1992 1992
19891 1990 1991 Q1 Q2p Mayr June p Junep
Installment 5.8 2.6 -1.0 -. 2 -3.0 -1.5 -1.7 721.9
Auto 1.4 -2.4 -7.6 -1.3 -7.8 -2.5 -12.9 257.0Revolving 15.2 11.9 8.9 4.1 3.0 1.5 4.2 247.1Other 4.2 .8 -2.3 -3.6 -4.0 -3.7 5.1 217.8
Noninstallment 3.9 -3.5 -10.0 17.5 .5 9.6 -19.2 55.1
Total 5.6 2.1 -1.7 1.0 -2.8 -. 7 -2.9 777.1
1. Growth rates are adjusted for discontinuity in data between December 1988 andJanuary 1989.
r--revised. p--preliminary.Note: Details may not add to totals due to rounding.
CONSUMER INTEREST RATES(Annual percentage rate)
19921989 1990 1991 Feb. Mar. Apr. May June
At commercial banksNew cars (48 mo.) 12.07 11.78 11.14 9.89 ... ... 9.52 ...Personal (24 mo.) 15.44 15.46 15.18 14.39 ... ... 14.28 ...Credit cards 18.02 18.17 18.23 18.09 ... ... 17.97 ...
At auto finance cos.New cars 12.62 12.54 12.41 10.19 10.92 11.07 10.67 10.25Used cars 16.18 15.99 15.60 14.00 14.19 14.11 14.01 13.89
1. Average of "mostthe first week of the
2. Average rate formaturity.
common" rate charged for specifiedmid-month of each quarter.all loans of each type made during
type and maturity during
the month regardless of
August 7, 1992Mortgage and Consumer Finance
III-23
The June decline in auto credit is consistent with anecdotal
evidence suggesting that households continue to substitute leasing
or home equity borrowing for more traditional loans when financing
auto purchases. Home equity lending at commercial banks grew at a
five percent rate in June. Although there are no comprehensive data
on the aggregate volume of consumer leasing activity, motor vehicle
leasing (passenger cars and commercial vehicles) at domestic finance
companies has been rising steadily over the past four months; in
June, leasing was up about 3-1/2 percent from the May level.
Although data on consumer loan rates for July and August will
not be available until late this month, anecdotal reports suggest
that auto loan rates may have eased further following the July 2
discount rate cut. Interest rates on new car loans at the domestic
captive auto finance companies dropped in the April-June period
after rising in the first quarter. Used car loan rates at these
companies have shown a similar pattern. Credit card issuers also
appear to continue to lower rates selectively to more creditworthy
borrowers.
Issuance of securities backed by consumer loans in the second
quarter about matched the pace seen in the first quarter, but was
well under that of 1990 and 1991 (chart). Credit card-backed issues
have been particularly slow this year, with only three banks placing
a total of $2.4 billion. In part, this slowdown reflects sluggish
growth in consumer debt; moreover, improved capital ratios and
cheaper on-balance-sheet financing have also reduced the needs of
banks to securitize these assets. In contrast, auto finance
companies, faced with increasing auto sales and seeking lower.
funding costs, have relied heavily on the asset-backed market this
year. Spreads have recently been very tight between yields on
securities backed by auto loans and Treasury securities of
III-24
Gross Public Issuance of Consumer Asset-Backed Securities(Monthly Averages)
Millions of Dollars-- 4000
i Other
SRevolving
- fIAuto
I/P
-- 3600
3200
2800
-- 2400
-1 2000
-1 1600
-- 1200
-- 800
L1991 1992
~N~~
1987 1988 1989 1990
III-25
comparable maturity. As a result, securitization of auto loans was
brisk in the first quarter, and fell only slightly off this pace in
the second quarter. To the extent that these spreads remain tight,
and auto sales continue at their recent pace, industry sources
expect issuance of auto loan-backed securities to grow in coming
months.
INTERNATIONAL DEVELOPMENTS
INTERNATIONAL DEVELOPMENTS
Merchandise Trade
The U.S. merchandise trade deficit in May was $7.4 billion
(seasonally adjusted, Census basis) compared with $7.1 billion
(revised) in April. Nonagricultural exports fell $1/2 billion in
May, the third consecutive month of decline; the decreases in April
and May were primarily in exports of aircraft. Non-oil imports
declined $3/4 billion in May with the decrease spread among most
major trade categories. A drop in the quantity of imported oil in
May was more than offset by an increase in its price (by about $1.20
per barrel). Data for June will be released on August 19.
U.S. MERCHANDISE TRADE: MONTHLY DATA(Billions of dollars, seasonally adjusted, Census basis)
Exports ImportsTotal Ag. NonAg. Total Oil Non-oil Balance
1991-Jul 35.2 3.4 31.8 40.8 4.1 36.8 -5.6Aug 34.5 3.3 31.2 41.1 4.5 36.5 -6.6Sep 35.3 3.3 32.0 41.8 4.5 37.2 -6.5
Oct 36.8 3.6 33.3 42.7 4.1 38.6 -5.9Nov 37.3 3.5 33.7 41.4 4.1 37.2 -4.1Dec 36.1 3.7 32.3 41.7 3.9 37.8 -5.6
1992-Jan 35.5 3.6 31.9 41.3 3.6 37.6 -5.8Feb 37.7 3.7 33.9 40.9 3.3 37.6 -3.3Mar 37.1 3.5 33.6 42.7 3.4 39.2 -5.6
Apr 36.4 3.8 32.7 43.5 4.0 39.5 -7.1May 35.5 3.3 32.2 42.9 4.1 38.7 -7.4
Source: U.S. Department of Commerce, Bureau of the Census.
For April-May combined, exports declined 3 percent from the
first-quarter average and imports rose 4 percent. As a result, the
deficit increased to an annual rate that was the largest quarterly
deficit since 1990-Q4.
IV-1
IV-2
MAJOR TRADE CATEGORIES(Billions of dollars, BOP basis, SAAR)
Year 1991 1992 $ Change1991 Q2 Q3 Q4 01 Q2-e Q2e-Q2 Q2e-Qi
Trade Balance -73.4 -65.6 -80.7 -74.2 -69.9 -100.2 -34.6 -30.3
Total U.S. Exports
Agricultural ExportsNonagric. Exports
Industrial Suppl.GoldFuelsOther Ind. Suppl.
Capital GoodsAircraft & PartsComputers & PartsOther Machinery
Automotive ProductsTo CanadaTo Other
Consumer GoodsOther Nonagric.
416.0 413.3 416.6 431.4 431.3 420.3
40.1 37.5 40.7 43.2 43.2 41.6375.8 375.8 375.9 388.2 388.1 378.7
101.83.6
14.383.9
167.036.427.3
103.3
40.022.817.5
101.33.2
13.085.2
169.438.727.2
103.4
39.721.917.8
100.53.4
12.784.3
166.735.426.8
104.5
43.725.018.7
100.03.6
14.781.8
176.340.827.9
107.5
41.723.118.6
99.73.8
13.982.0
176.342.627.4
106.3
42.920.822.1
98.43.4
13.082.0
168.634.628.1
105.9
45.522.622.9
45.9 44.5 44.9 48.2 47.9 47.521.0 20.9 20.1 22.1 21.3 18.7
7.0 -11.0
4.1 -1.62.9 -9.4
-2.90.20.1
-3.2
-0.8-4.20.92.5
-1.3-0.4-0.9-0.0
-7.7-8.1
0.8-0.4
5.8 2.60.7 1.85.1 0.8
3.0 -0.4-2.3 -2./
Total U.S. Imports
Oil ImportsNon-Oil Imports
Industrial Suppl.GoldOther FuelsOther Ind. Suppl.
Capital GoodsAircraft & PartsComputers & PartsOther Machinery
Automotive ProductsFrom CanadaFrom Other
Consumer GoodsFoodsAll Other
489.4 478.9 497.3 505.6 501.2 520.5 41.6 19.4
51.2 51.7 52.5 48.8438.2 427.1 444.8 456.8
83.92.93.9
77.1
120.711.726.182.9
84.928.856.2
108.026.514.1
80.43.03.9
73.5
120.412.225.882.4
79.128.151.0
101.627.618.0
80.02.33.8
73.9
121.312.527.181.7
90.833.157.7
109.926.316.5
83.33.14.875.4
122.111.526.883.8
88.630.158.5
118.726.417.7
41.4 48.7459.8 471.8
84.42.24.4
77.8
125.212.127.785.4
87.830.956.9
116.326.819.2
87.53.04.480.1
129.813.330.086.5
90.131.159.0
117.828.118.5
-3.0 7.344.7 12.1
7.10.00.56.6
9.51.14.24.1
11.03.08.0
16.20.50.4
3.10.80.02.3
4.61.22.31.1
2.30.12.1
1.51.3
-0.8
e--Average of first 2 months of quarter at an annual rate.Source: U.S. Department of Commerce, Bureau of Economic Analysis.
IV-3
Exports to Western Europe and Japan edged down in April-May as
economic activity in such key markets as the United Kingdom,
Germany, and Japan turned down in the second quarter. Shipments to
developing countries in both Asia and Latin America flattened out.
Exports to Canada and Mexico continued to move up, supported in
large part by automotive shipments. By trade category, the largest
decline was in exported civilian aircraft which decreased from a
very strong first-quarter level; deliveries of aircraft have been
particularly volatile in recent months. The remaining decline in
exports in April-May was in industrial supplies (coal, metals,
building materials) and agricultural products (particularly wheat
and corn). Other categories of exports recorded increases,
especially automotive products, computers, and chemicals.
Non-oil imports were 2.5 percent higher in April-May than the
first-quarter average, with the increase spread among all major
trade categories. From the fourth quarter of last year through
April-May, the quantity of non-oil imports expanded at a 6 percent
annual rate. Imported computers and semiconductors accounted for
two-thirds of the overall rise. The quantity of other non-oil
imports increased at a 2-1/2 percent annual rate over the same
period. The categories that grew most were household appliances,
apparel, passenger cars, civilian aircraft, industrial machinery,
metals, paper, and fruits and vegetables.
An 18 percent increase in the value of oil imports in April-May
was split between increased quantity and higher prices. A normal
seasonal switch to stockbuilding pushed up the quantity of oil
imports in April-May. Imports in the first quarter had been
restrained by mild weather and stock drawdowns. Preliminary
Department of Energy data suggests that imports in June fell
slightly from the April-May rate; preliminary figures also suggest a
IV-4
rebound of consumption in July which could push imports well above 8
mb/d.
In May, oil import prices continued to respond to OPEC
production restraint, especially on the part of Saudi Arabia, which
had begun to push spot prices up in March. Spot prices of West
OIL IMPORTS(BOP basis, adjusted 1/ annual rates)
1991 1992 MonthsQ4 Q1 A/M Feb Mar Apr May
Value (Bil. $) 48.78 41.42 48.72 39.76 40.92 47.83 49.60Price ($/BBL) 18.05 15.28 16.78 15.18 15.18 16.16 17.39Quantity (mb/d) 7.40 7.42 7.96 7.17 7.38 8.11 7.81
1/ Oil imports are not seasonally adjusted: they are adjusted only forthe number of days in the month.Source: U.S. Department of Commerce, Bureau of Economic Analysis.
Texas Intermediate crude (WTI) continued to rise through late June,
before holding steady at approximately $22.00 per barrel throughout
July. More recently, spot prices have eased somewhat with the
unwinding of tensions over U.N. surveillance of Iraq; spot WTI
currently stands at slightly above $21.00 per barrel. This pattern
of spot prices suggests that import prices will likely rise through
July, to roughly $19.50 per barrel.
Prices of Exports and Non-oil Imports
Prices of U.S. exports rose 0.1 percent in June bringing the
increase for the second quarter to 1.6 percent at an annual rate
(BLS prices). This increase contrasts with a decline of similar
magnitude in the first quarter. The increase in the second quarter
was attributable primarily to higher prices of exported industrial
supplies (especially fuels and building materials), with smaller
increases recorded for consumer goods and automotive products.
Prices of agricultural exports (notably wheat and corn) declined in
the second quarter.
IV-5
EXPORT AND IMPORT PRICE MEASURES(percent change from previous period, annual rate)
Year Quarters Months1992-Q2 1991 1992 19921991-Q2 Q4 Q1 - Q2 May Jun
(Quarterly Average, AR) (Monthly Rates)
-------------------- BLS Prices-------------------
Exports. Total 0.0 2.5 -1.4 1.6 0.3 0.1Foods, Feeds, Bev. 1.7 17.6 -1.3 -2.1 -0.1 0.2Industrial Supplies -3.2 -3.0 -6.5 5.3 0.8 -0.2Capital Goods 1.1 2.2 0.7 -0.1 0.1 0.3Automotive Products 2.0 3.0 1.6 1.0 0.0 0.1Consumer Goods 1.9 2.5 5.9 1.6 0.6 -0.3
Memo:Agricultural -0.7 10.8 -3.3 -1.0 0.2 0.6Nonagricultural 0.0 1.2 -1.3 2.1 0.3 0.0
Imports. Total 0.4 5.2 -1.2 1.1 0.6 1.1Foods, Feeds, Bev. -1.7 3.7 10.0 -15.1 -2.5 0.3Industrial Supplies -1.9 3.1 -15.1 13.4 2.5 2.4
Ind Supp Ex Oil* -2.0 -4.3 4.7 -0.7 0.0 0.2Capital Goods 0.7 6.5 4.7 -3.6 -0.1 0.7Automotive Products 1.1 7.4 0.9 -2.6 -0.3 0.7Consumer Goods 2.7 5.1 6.2 0.4 0.3 0.4
Memo:Oil -1.8 19.5 -45.0 50.3 7.7 6.6Non-oil 0.6 3.9 4.4 -2.7 -0.2 0.5
------------- Prices in the NIPA Accounts----------
Fixed-WeightExports, Total -0.1 2.2 -0.7 0.7
Ag -1.5 10.4 -4.1 -2.5Nonag 0.1 1.1 -0.4 1.1 -
Imports, Total 1.5 4.1 -4.2 9.0Oil -0.7 20.1 -48.9 60.3Non-oil 1.8 2.2 1.8 5.4
DeflatorsExports, Total -1.2 1.1 -1.1 -1.8
Ag -2.2 4.6 -5.2 -1.5Nonag -1.1 0.6 -0.7 -1.8
Imports, Total -1.4 2.3 -6.9 3.8Oil -0.6 20.4 -48.6 59.1Non-oil -1.6 0.2 -1.5 -0.2
*/ Months for this series are not for publication.
IV-6
An increase in prices of non-oil imports in June slowed the
decline in prices for the second quarter on average to 2.7 percent
at an annual rate. The downward swing in prices in the second
quarter, after two quarterly increases, reflected, in part, a lagged
adjustment to the rise in the exchange value of the dollar during
the first quarter of this year. While the largest declines were
registered in foods, significant decreases were also reported for
imported capital goods, passenger cars, and recreational and home
entertainment equipment.
U.S. International Financial Transactions
Capital transactions thus far recorded for the second quarter
register large inflows, especially through foreign private purchases
of U.S. Treasury securities and increases in foreign official
reserves in the United States. (See lines 1-5 of the Summary Table
of U.S. International Transactions.) Data for direct investment and
certain other capital flows are not yet available, but for those
categories that are available recorded net inflows totaled almost
$30 billion in the second quarter, compared with $20 billion in the
first quarter. This increase in net capital inflows more than
offsets our projected deterioration in the current account,
suggesting that the large negative statistical discrepancy recorded
in the first quarter was likely not reversed in the second.
Foreign official reserves in the United States rose rapidly in
May and June
For the second quarter
as a whole, official reserves in the United States increased $21
billion (line 4). Most of the increase was attributable to non-G-10
IV-7
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars)
1990 1991 1991 1992 1992
Year Year Q.3 _ 01 02 Apr May June
Private Capital
Banks
1. Change in net foreign 1positions of banking offices
in the U.S. (+ - inflow)
Securities
2. Private securities2
transactions, net
a) foreign net purchases3
(+) of U.S. corporate bonds
b) foreign net purchases
(+) of U.S. corporate stocks
c) U.S. net purchases (-) of
foreign securities
3. Foreign net purchases (+) of U.S.
Treasury obligations
Official Capital
4. Changes in foreign official
reserves assets in U.S.
(+ - increase)
a) By area
G-10 countries
OPEC
All other countries
b) By type
U.S. Treasury securities4
Other
5. Changes in U.S. official reserve
assets (+ - decrease)
5Other transactions (Quarterly data)
6. U.S. direct investment (-) abroad
7. Foreign direct investment (+) in U.S.6
8. Other capital flows (+ - inflow)
9, U.S. current account balance
10. Statistical discrepancy
36.6 -19 2 111 -2.0 3.9 -5.5 0.3 3.7 -9.5
-29.1 -11.4 -2.5 -6.7 -4.3 2.3 -_.2 0.2 2.3
16.2 25.7 8.2 6.5 7.7 11.9 4.1 3.7 4.1
-13.7 10.1 2.3 -1.5 -2.8 -0.8 -0.3 0.1 -0.5
-31.6 -47.3 -13.0 -11.8 -9.2 -8.8 -4,0 -3.6 -1.3
.0 1 .8 -0.7 10.4 5.1 -5.1 10.5
1 16.0 4 133 21.1 20.6
10.0 -17.6
1.2 -5.8
20.8 39.3
4.0 9.0 7.6
-1.9 0.5 2.4 3.3 -1.5 2.8 2.0
-4.4 1.2 2.8 -2.6 -0.3 -3.1 0.99.8 11.5 15.9 19.8 5.8 9.3 4.7
29.6 14.8 5.6 12.6 14.9 11.6 2.6 5.6 3.42.5 1.1 -2.2 0.7 6.2 9.0 1.4 3.4 4.1
-2 . 3.9 1_2 -1.1 1.8 -0.2 2_0 *
-32.7
45.1
-5.8
-90.4
47.4
-27.1
11.5
11.4
-3.7
-1.1
-7.1
*
5.0
-11.1
-1.5
-11.7
5.7
3.5
-7.2
2.4
-11.3
0.7
12.7
-5.3
-15.7
n.a.
n.a.
n.a.
n.a.
n.a.
MEMO:
U.S. merchandise trade balance -- part
of line 9 (Balance of payments basis,
seasonally adjusted) -108.9 -73.4 -20.2 -18.5 -17.5 n.a. n.a. n.a. n.a.
1. Includes changes in positions of all depository institutions, bank-holding companies, and certain transactionsbetween brokers/dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements.)
2. These data have not been adjusted to exclude commissions on securities transactions and, therefore, do not match
exactly the data on U.S. international transactions as published by the Department of Commerce.3. Includes all U.S. bonds other than Treasury obligations.
4. Includes deposits in banks, commercial paper, acceptances, borrowing under repurchase agreements, and other securities.
5. Seasonally adjusted.
6. Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other banking and
official transactions not shown elsewhere. In addition, it includes amounts resulting from adjustments to the data made bythe Department of Commerce and revisions to the data in lines 1 through 5 since publication of the quarterly data in theSurvey of Current Business.*--Less than $50 million.
NOTE: Details may not add to total because of rounding.
IV-8
countries, primarily Spain and Taiwan, and to the BIS. Argentina
and Chile also recorded noticeable increases. Thailand's reserves
in the United States rode the wake of this spring's political unrest
by rising $3-3/4 billion in May and falling $2-1/4 billion in June.
Partial data for July from the FRBNY indicate further large inflows
of official capital.
Private foreign net purchases of U.S. corporate and agency
bonds remained brisk in May and June and totaled $12 billion for the
second quarter (see line 2a), as U.S. corporations continued to
issue debt at a record-setting pace. Foreigners resumed selling
U.S. equities on a modest scale in June, bringing the total sales
for the quarter to $3/4 billion (line 2b). Japanese residents made
small net purchases of U.S. equities in June, their first monthly
net purchases since last November.
Private foreigners' net purchases of Treasury securities were
large but erratic during the second quarter. Purchases of $5
billion in April were offset by equally large sales in May (line 3).
In June purchases totaled more than $10 billion. The sales in May
were concentrated in the United Kingdom while the purchases in June
were primarily by Japan, the World Bank, and offshore financial
centers.
U.S. residents continued to purchase foreign securities on a
large scale in May and June, bringing the total for the second
quarter to $9 billion (line 2c). Unlike earlier in the year when
net purchases were evenly split between bonds and equities, the bulk
of the purchases in May and June were in foreign bonds, coinciding
with exceptionally large issuance of Yankee bonds.
Banks in the United States, especially Japanese-based banks,
continued to rely on their own foreign offices for funds in the
INTERNATIONAL BANKING DATA
(Billions of dollars)
1990 1991 1992
Mar. June Sept. Dec. Mar, June Sept. Dec. Mar. June July !/
1. Net Claims of U.S. Banking
Offices (excluding IBFS) on Own
Foreign Offices and IBFS -11.7 -11.0 -15,6 -31.3 -23.8 -13.7 -14,1 -35.8 -41.4 -56.8 -55,0
(a) U.S.-chartered banks 12.2 7.2 5.7 5.5 7.6 5.4 11.0 12.4 3.2 8.3 9.4
(b) Foreign-chartered banks -23.9 -18.2 -21,3 -36.9 -31.3 -19.2 -25.2 -48.3 -44.6 -65.0 -64.4
2. Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks 21.8 22.2 24.0 24.7 26.0 23.9 23.7 23.9 23.3 24.5 25.0
3. Eurodollar Holdings of
U.S. Nonbank Residents 1/ 110.6 106,5 109.1 116.1 114.6 105.8 100.8 102.9 100.3 90.0 88.4
1. Includes term and overnight Eurodollars held by money market mutual funds. Note: These data differ in coverage and timing from
the overall banking data incorporated in the international transactions accounts, Line 1 is an average of daily data reported to
the Federal Reserve by U.S. banking offices. Line 2 is an average of daily data. Line 3 is an average of daily data for the
overnight component and an average of Wednesday data for the term component.
*/ Includes data through only July 27.
IV-10
second quarter. On a monthly average basis, net claims on own
foreign offices and IBFs decreased by $15 billion between March and
June. (See line 1 of the table of International Banking Data.)
Partial data for July indicate only a slight increase in net claims.
This pattern is distorted in the month-end data reported in line 1
of the Summary Table due to an extraordinary increase in net claims
on the last day of June that was then reversed early in July.
Foreign Exchange Markets
The weighted-average foreign-exchange value of the dollar, in
terms of the other G-10 currencies, has declined about 2-1/2 percent
on balance since June 30, the first day of the last FOMC meeting, as
shown in the top panel of the accompanying chart. On July 2, the
day after the FOMC meeting, the dollar declined in response to weak
U.S. June employment data and the subsequent 1/2 percentage point
reduction in the U.S. discount and federal funds rates. Later, the
dollar moved lower following the German discount rate hike and
unfavorable U.S. trade data for May. The dollar reached a low on
July 20 of DM 1.4470, just above the all-time low of DM 1.4430.
The dollar
later moved above DM 1.50 on tensions between Iraq and the United
Nations, but moved back when those tensions abated. Following U.S.
July employment data that showed less improvement than some had
expected, the dollar moved below DM 1.47 on August 7. and the Desk
intervened again.
. In total, the Desk has
purchased $770 million against marks.
IV-11
As shown in the bottom panel, the dollar has declined about 4
percent on net against the mark since June 30, as German interest
rates firmed slightly while U.S. rates declined. The Bundesbank
raised its discount rate 3/4 percentage point on July 16, to 8-3/4
percent, while leaving the Lombard rate unchanged at 9-3/4 percent.
By reducing the amount of subsidy that German banks receive from
being able to borrow up to a given quota at the below-market
discount rate, the Bundesbank's move was expected to reduce bank
profits and possibly slow the pace of credit expansion. The move
should not by itself have had any direct effect on German money
market rates, because it did not change the marginal cost of funds
to banks. However, perhaps because the action was seen as raising
the likelihood of an eventual increase in the Lombard rate, the mark
strengthened against other EMS currencies, prompting moderate
interest rate hikes by several other European central banks. The
Netherlands Bank raised its rate on special advances twice, by a
total of 30 basis points, to 9.60 percent. The Belgian advances
rate was increased 15 basis points to 9.45 percent. The Italian
discount rate was raised from 13 percent to 13-3/4 percent, but
later was lowered to 13-1/4 percent following an agreement between
the government and labor unions to end Italy's system of automatic
wage indexation.
Subsequent to the German
IV-12
WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLARMarcn 1973 = 100
Daily iFOMC
July 1
May June July August
SELECTED DOLLAR EXCHANGE RATES
Daily IFOMC
July 1
May 1 = 100
German Mark
Japanese Yen- /NIh
August
IV-13
discount rate hike, rates on the Bundesbank's repurchase tenders
were nudged up 5 basis points. The upward trend in interest rates
weighed on European stock prices; price indexes declined about 11
percent in the United Kingdom, Germany, and Italy, and about 7
percent in France.
The dollar has gained about 1 percent against the Japanese yen
since the last FOMC meeting. Following Japanese parliamentary
elections, the Bank of Japan responded to further signs of economic
weakness by lowering its official discount rate 1/2 percentage point
to 3-1/4 percent, with the overnight call money rate allowed to
decline by a similar amount. The Bank of Japan attempted to
mitigate the yen's decline by selling dollars against yen. The
Nikkei stock price index fell to new six-year lows despite the rate
cut. On balance, the Nikkei index is about 7 percent lower over the
intermeeting period.
Developments in Foreign Industrial Countries
Activity in most major foreign industrial countries appears to
have slowed in recent months. In Japan, evidence from the second
quarter, including further softening of labor market conditions in
June, points to deceleration of activity and demand. Recent west
German indicators (such as retail sales, orders, and another
increase in the unemployment rate in July) suggest that underlying
growth has weakened, and real GDP is estimated to have fallen about
3 percent (s.a.a.r.) in the second quarter following its unusually
strong first-quarter performance. France and Italy have shown signs
of modest growth, but the United Kingdom appears to have remained in
recession in the second quarter. The Canadian recovery recently has
been confined largely to the external sector where exports have been
strong; the unemployment rate (s.a.) stayed above 11-1/2 percent in
IV-14
July, and other indicators suggest that domestic demand and activity
have been soft.
Measured rates of year-over-year inflation have continued to
edge down in many countries, although in some cases the reduction is
attributable to special factors. Other evidence, however, including
deceleration of wages, suggests that underlying inflationary
pressure has lessened.
Several countries recorded wider current account deficits in
June, contrary to the general narrowing trend this year in countries
in deficit. In Japan, the current account surplus (s.a.) has
continued to expand to an annual rate nearing $115 billion.
Individual country notes. In Japan, recent economic indicators
point to further weakening in the pace of economic activity.
Industrial production (s.a.) increased 2.1 percent in June, but this
mainly represented recovery from the 1.9 percent decline of the
previous month when a number of plants were temporarily closed for
inspections. For the second quarter as a whole, industrial
production was 2.4 percent below its first-quarter level. The
inventory-to-shipments ratio (s.a.) declined 2.3 percent in June,
but remained nearly 18 percent above its low point of October 1990.
The capacity utilization rate (s.a.) declined an additional 1.4
percent in May, falling 11.8 percent below its October 1990 peak.
The value of retail sales showed a 12-month decline of 4.4 percent
in June. Construction orders fell 15.4 percent from a year earlier
in June, and new machinery orders (s.a.) fell 13.1 percent in May.
New passenger car registrations (s.a.) increased 7.3 percent in
June, but this only partially reversed a sharp decline in the
previous month; for the second quarter as a whole, new car
registrations were down 6.7 percent from the first quarter. Housing
REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES(Percentage change from previous period, seasonally adjusted) 1
Q4/Q4 Q4/Q41990 1991
1991 1992 1992------------------ -------- Latest 3 months
Q3 Q4 Q1 02 Feb. Mar. Apr. May June from year ago 2
Canada
GDPIP
France
GDPIP
West Germany
GNPIP
Italy
GDPIP
Japan
GNPIP
United Kingdom
GDPIP
United States
GNPIP
-2.0 -.0-6.3 -1.4
1.5 1.7-. 3 1.9
.1 .0 .4 n.a.
.7 -1.1 -.5 n.a,
1.1 .1 1.0 n.a..6 -.2 .1 n.a.
5.3 .9 -.4 -.5 1.8 n.a.5.4 .3 -.5 -1.2 2.8 -2.2
1.6 1.8-3.8 -. 5
4.7 3.26.9 -1.6
-. 7 -1.7-3.1 -. 8
-. 5 .1.3 -. 5
.3 .4 .6 n.a.-.3 1.1 2.5 n.a.
.5 -.0 1.0 n.a.
.1 -1.2 -3.1 -2.4
.2 -.4 -.4 n.a.1.0 -. 1 -.8 -.2
.3 .1 .7 .31.6 -.2 -.7 1.1
.4 .5 .2 -. 7 n.a.
-.8 -.3 1.4 -1.6 n.a.
1.2 -1.8 -.7 -. 1 -2.1
2.3 -.3 -5.5 4.2 n.a.
-.5 -2.6 .1 -1.9 2.1
1.1 -.7 .5 -.9 .2
.5 .4 .5 .5 -.3
1. Asterisk indicates that monthly data are not available.2. For quarterly data, latest quarter from year ago.
1.9.1
2.71.2
.8-1.1
2.2-6.4
-1.5-. 2
1.51.8
I
--
CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES(Percentage change from previous period) 1
Q4/Q4 Q4/Q41990 1991
1992 1992------------------------- -- ------- --------------------------- Latest 3 months
Q1 Q2 Q3 Q4 Q1 Q2 Apr. May June July from year ago
Canada
CPIWPI
France
CPIWPI
West Germany
CPIWPI
Italy
CPIWPI
Japan
CPIWPI
United Kingdom
CPIWPI
United States
CPI (SA)WPI (SA)
4.9 4.11.9 -3.2
3.6 2.9.7 -3.6
3.0 3.9.9 1.6
6.3 6.19.9 1.1
3.2 3.21.9 -1.3
10.0 4.25.9 4.9
6.3 3.06.4 -.1
2.9-. 3
.5-. 5
.7-1.6
.7-1.5
.6 -. 1-. 9 -. 4
.9-1.0
.8 .9 1.5
.5 .3 .7
.4 .5
.5 .6
.7n.a.
.7 1.2
.2 .4
1.9 1.4 1.0 1.7 1.4 1.2.2 -1.0 .5 1.4 .0 n.a.
.8 .8
.1 -. 4
.6 2.11.8 1.9
.4 1.1 -. 3 1.3-. 4 -. 7 -. 4 .0
1.0 .5 2.2.5 1.4 1.1
.7 .9 .7 .8
.0 .5 .0 .6
.2 .2 n.a.
.6 .0 n.a.
.2 .3 .1 n.a.K X
.3 .4 .2
.3 .0 -. 1
.4 .5 .3
.8 .2 n.a.
.0n.a.
.2n.a.
.0 -. 4-. 2 n.a.
.4 .0 n.a.
.1 .0 .1
.2 .1 .3 .1
.1 .4 .2 .1
indicates that monthly data are not available.
1.4-. 3
3.1-3.1
2.3-1.4
4.23.5
3.11.5
1. A-terisk
TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)
1990 19911991 1992
------- ------
Q1 Q2 Q3 Q4 Q1 Q2
1992
Apr. May June July
Canada
TradeCurrent account
France
TradeCurrent account
Germany 2
Trade (NSA)Current Account
Italy
TradeCurrent account
Japan
TradeCurrent account
United Kingdom
TradeCurrent account
United States
TradeCurrent account
(NSA)
(NSA)
9.4 5.0-18.9 -25.5
-9.3 -5.5-9.5 n.a.
65.2 12.946.4 -19.5
-12.2 -13.0-14.4 -21.5
51.8 78.835.8 72.6
-32.6 -18.0-26.8 -8.2
-108.9 -73.4-90.4 -3.7
1.5 1 .7-5.6 -6.0
-2.7 -1.5 -1.5-4.0 -1.6 -. 2
,9 1.0 1.7-6.6 -7.3 -5.9
.3n.a.
n.a.n.a.
.5 1.0X X
.9 2.0n.a. n.a.
4.4 -1.1 2.8 6.7 4.4 3.4-5.6 -5.8 -5.8 -2.2 -5.6 -6.4
-1.3 -3.6 -4.8 -3.3 -2.0 -4.0-8.1 -4.6 -3.7 -5.0 n.a. n.a.
17.4 18.8 20.8 21.9 28.0 24.512.8 18.7 19.6 21.5 28.5 28.6
-5.8 -3.8 -4.0 -4.5 -5.4 -5.6-4.4 -.5 -2.1 -1.1 -3.8 -4.5
-18.3 -16.4 -20.2 -18.5 -17.5 n.a.12.2 2.4 -11.1 -7.2 -5.3 n.a.
1.4-1.2
n.a. n.a.X X
.8 -. 2 n.a.n X X
.7-2.5
1.3 n.a.-2.7 n.a,
-1.2 -1.4 -1.5X N X
n.a.N
6.9 9.7 7.9 8.59.3 10.9 8.41 n.a.
-2.4 -1.5 -1.7 n.a,-2.0 -1.1 -1.3 n.a.
-8.1 -8.6 n.a.X X X
n. a.X
1. The current account includes goods, services, and privatethat monthly data are not available.2. Before July 1990, West Germany only.
and official transfers. Asterisk indicates
IV-18
starts (s.a.), which had increased strongly earlier in the year.
have leveled off recently, edging down 0.3 percent in June and
showing only a 0.9 percent increase during the second quarter. The
unemployment rate (s.a.) remained steady at 2.1 percent in June, but
the job-offers-to-applicants ratio (s.a.) dropped 5-1/4 percent to
1.08.
Price pressures have continued to ease on balance. Tokyo
consumer prices (n.s.a.) declined 0.4 percent in July and were 2
percent above their level twelve months earlier. Wholesale prices
(n.s.a.) were down 0.2 percent in June and showed a 12-month decline
of 1.5 percent, reflecting in large part a 7.4 percent reduction in
import prices over this period.
The trade surplus (customs basis, s.a.) expanded somewhat in
July, and for the first seven months of the year was in surplus by
almost $105 billion (a.r.); the current account surplus (s.a.a.r.)
in the first half of the year was nearly $115 billion.
Real GDP in western Germany is estimated to have fallen in the
second quarter about 3 percent (s.a.a.r.) following very robust
growth in the first quarter that was due in large part to strength
in construction activity encouraged by mild weather. West German
industrial production (s.a.) fell 2.1 percent in June after
declining 0.7 percent in the previous two months, and the average
level of industrial production in the second quarter was 2.2 percent
below its first-quarter level. The volume of new orders for west
German manufactured goods (s.a.) also fell (1.8 percent) in June for
the fourth consecutive month, as domestic orders (including orders
from eastern Germany) tumbled 3 percent.
The west German unemployment rate has increased 0.1 percentage
point in each of the past five months and in July stood at 6.7
percent. Although unemployment has risen, the number of jobs in
IV-19
western Germany has been expanding slowly. Capacity utilization in
June was 0.7 percentage point below its level in March, and, at 85
percent, was 5-1/2 percentage points below its December 1990 peak.
Industrial production in eastern Germany (n.s.a.) fell 8
percent in April, but on a year-over-year basis continued its upward
trend and recorded a 12-month growth rate of 3 percent.
Consumer-price inflation in western Germany has moderated
somewhat in recent months. Consumer prices (n.s.a.) were unchanged
in July after advancing 0.2 and 0.4 percent in the previous two
months. On a year-over-year basis, consumer prices were up 3.3
percent in July, compared with 4.3 percent in June. Most of this
decline reflects elimination of the impact of excise tax increases
introduced in July 1991 on year-over-year measures of CPI inflation.
The pan-German current account deficit widened in the second quarter
to more than $25 billion (a.r.) primarily because of slower exports.
Through June, M3 (s.a.) in western and eastern Germany had
increased at a revised annual rate of 8.7 percent in 1992 relative
to the fourth quarter of 1991. Although the June increase was below
growth rates near 9-1/2 percent registered earlier in the year.
June's figure was still well above the Bundesbank's target range of
3-1/2 to 5-1/2 percent growth for 1992. Demand on the asset side of
banks' balance sheets remains strong, and the supply of funds to the
banking sector has shifted toward shorter maturities in reaction to
Germany's inverted yield curve. In response to rapid money growth
and concerns about inflation, the Bundesbank raised its discount
rate by 3/4 percentage point on July 16, but did not alter its
Lombard rate.
In recent weeks, the German government has shown a renewed
sense of urgency regarding progress towards fiscal consolidation,
preferably without tax increases. On July 1, the Cabinet approved a
IV-20
proposed 1993 Federal budget and medium-term financial plan that
would restrict the annual growth of nominal expenditures to 2.5
percent during the next four years.
In France, monthly indicators suggest that GDP growth slowed in
the second quarter from the rapid 4 percent pace (s.a.a.r.)
registered in the first quarter. Industrial production (s.a.) fell
1.6 percent in May, negating a 1.4 percent increase in April.
However, much of the drop was due to a fall in energy production;
manufacturing output declined only 0.4 percent, following a rise of
0.3 percent in the previous month. The latest monthly business
survey by the Bank of France indicates that industrial production
rose slightly in June and foreign orders remained strong, but retail
sales contracted.
Consumer prices rose 3 percent in June from their year-earlier
level, down slightly from the 3.1 percent rate registered in both
April and May. This favorable inflation performance was supported
by further deceleration of wages. Hourly wages in the June survey
were only 3.1 percent above their year-earlier level, down
significantly from the 4.3 percent increase recorded in April.
France registered a monthly trade deficit of $180 million
(s.a.) in June, the first this year, as imports surged 8 percent
from their level in May while exports rose only 3 percent. The
increase in imports was attributed to a rise in imported investment
goods, which constitute roughly one-third of total imports. Over
the first half of this year the trade surplus was $2.9 billion,
compared with a deficit of $4.3 billion during the same period in
1991; exports rose 6.3 percent, and imports declined slightly over
this period.
IV-21
The government has announced that a referendum on the
Maastricht Treaty will be held on September 20; polls continue to
show a majority in favor of the treaty.
In Italy, the economy continues to grow at a modest pace after
recording real GDP growth of 2.4 percent (s.a.a.r.) in the first
quarter (up from 1.8 percent in the previous quarter). Industrial
production (s.a.) rose 4.2 percent in May after a sharp decline in
April; the average for the two months was down 3.1 percent from the
first-quarter level. Auto sales were up 10.4 percent in the second
quarter from the same period a year earlier, but most of the gain
went to imports; sales by Italian auto manufacturers rose only 5
percent.
Inflation has eased recently. Consumer prices (n.s.a.)
increased only 0.2 percent in July, while the 12-month rise remained
at 5.4 percent, down from about 6 percent at the beginning of the
year. Wholesale prices (n.s.a.) in May were 3 percent above a year
earlier, the same as in April. The cumulative trade deficit during
the first six months of 1992 was $11 billion (s.a.a.r.), up from
$9.7 billion in the same period in 1991.
The new government of Prime Minister Giuliano Amato that took
office in early July has moved swiftly to try to gain control of
Italy's burgeoning budget deficit. Downward pressure on the lira
within the EMS that led the Bank of Italy to raise its discount rate
twice during July (partly reversed by a cut in early August) was an
important factor pushing the government to act. A supplementary
budget package that contains various one-time tax increases and a
freeze on public-sector wages was approved by the Italian parliament
in early August. A number of government-owned firms have been
converted to joint-stock companies in preparation for partial
privatization, a step that the government intends to carry out
IV-22
before the end of the year. Longer-term budget reforms reportedly
are being considered for the 1993 budget proposal, which will be
made public in September. Also, in August the government signed a
key accord with trade unions and employers that will reform the
process of wage negotiation.
Recent data shed doubt on whether economic recovery has begun
in the United Kingdom. Total industrial production (s.a.) rose 0.2
percent in June after contracting 0.9 percent in the previous month;
however, the second-quarter average was down 0.2 percent from the
first-quarter level and from the level a year ago. Manufacturing
production also rose 0.2 percent in June, but the second-quarter
average level was only 0.4 percent above the first quarter. After
recovering strongly in the first five months of the year, consumer
confidence fell in June and July. Retail sales volume turned down
in June, leaving the second-quarter average 0.5 percent above the
average first-quarter level. Business confidence, which had been
recovering, also deteriorated in June and July. The unemployment
rate (s.a.) rose in July to 9.7 percent.
Retail prices were steady in June and stood 3.9 percent above
their year-earlier level. Excluding mortgage interest rates,
consumer prices edged up to a level 4.8 percent above their level of
June 1991. Producers' output prices increased only 0.1 percent in
July to a level 3.4 percent above a year ago. Underlying wage
inflation fell to an annual rate of 6-1/4 percent in June, and
recent pay settlements (a more forward looking indicator of wage
inflation) are in the neighborhood of 4-1/4 percent.
In June, the trade deficit widened to $1.7 billion bringing the
cumulative deficit to $23 billion (s.a.a.r.) for the first half of
1992 compared with a deficit of $19 billion in the previous half-
year. The current account deficit (s.a.) deteriorated from $5.7
IV-23
billion in the second half of 1991 to $16.7 billion in the first
half of this year.
In Canada, available second-quarter data on economic activity
suggest a tepid but ongoing recovery. Industrial production (s.a.)
for April and May, taken together, was 0.3 percent above its first-
quarter average. Second-quarter housing starts (s.a.) increased 9
percent. However, many May indicators suggested continued
sluggishness, as real GDP at factor cost (s.a.) slipped 0.1 percent,
retail sales (s.a.) fell 0.7 percent, factory shipments (s.a.) were
off 0.5 percent, and new orders (s.a.) dropped 2.4 percent, after
April increases in all four series. In June, motor vehicle sales
(s.a.) were virtually unchanged for the fourth straight month. In
addition, in July the unemployment rate (s.a.) was unchanged from
its eight-year high of 11.6 percent.
The CPI, excluding food and energy (n.s.a.), was unchanged in
June, lowering twelve-month inflation from 2 percent to 1.9 percent.
The all-items CPI increased only 1.1 percent over this period.
Wholesale prices (n.s.a.) were unchanged in June and stood 0.2
percent higher than a year earlier. The annual rate of increase in
wages engendered by May collective bargaining agreements was 1.3
percent (a.r.), the lowest in more than 20 years.
Canada's current account deficit (s.a.a.r.) decreased $5.5
billion in the first quarter to $23.8 billion, as merchandise
exports rose briskly. The merchandise trade surplus (s.a.a.r.) for
April and May, taken together, was $9.2 billion, above its first-
quarter level of $6.8 billion.
Quebec and the English-speaking provinces will hold formal
constitutional negotiations on August 20, the first since 1990.
Should these talks fail to produce an agreement, Quebec premier
IV-24
Robert Bourassa has promised to hold a referendum on the province's
political future by October 26, 1992.
Developments in East European Countries and Russia
In Poland, Hanna Suchocka was appointed prime minister in mid-
July, following unsuccessful attempts by her predecessor to form a
government. Despite domestic political turmoil, the real economy
has performed surprisingly well so far in 1992, with increased
industrial sales, moderating inflation, rising exports, and
increased international reserves. The new finance minister has
confirmed the government's intention to keep the budget deficit to 5
percent of GDP this year, as previously agreed with the IMF.
However, the budgetary situation remains highly uncertain. The IMF
is currently conducting negotiations with the new government on a
15-month stand-by arrangement that could be implemented later this
year.
In late July, Czech and Slovak leaders publicly confirmed that
the federation would break up; the dissolution had been widely
expected following the Slovak nationalist election victory in June.
While the leaders claimed agreement had been reached on several
basic principles of coexistence following the split, including a
customs union and a free trade zone, details remain vague.
Furthermore, the leaders acknowledged that agreement on common
budgetary, fiscal, and monetary policies was more difficult.
On August 5, the IMF Executive Board approved a $1 billion
first-credit-tranche stand-by arrangement for Russia. This program
represents a more modest level of initial IMF lending to Russia than
earlier expectations of an upper-credit-tranche program. As a
condition for approval of this arrangement, the Russian government
has agreed to implement a policy program that will limit further
macroeconomic deterioration.
IV-25
In the first half of the year, industrial output fell 13.5
percent. Although the rate of inflation has declined after a 250
percent jump in January following price liberalization, it was still
high in June at 25 percent (monthly rate). From January through
June, the government deficit amounted to 8.1 percent of GDP,
considerably higher than projected. Russia has agreed to adopt
measures to reduce the fiscal deficit, tighten monetary policy.
settle growing inter-enterprise arrears, and rationalize relations
with other republics of the former Soviet Union that use the ruble
as their currency.
On July 16, the Chairman of the Central Bank of Russia, Georgy
Matyukhin, resigned, and former Soviet Gosbank Chairman, Viktor
Geraschenko, was named acting head of the central bank. After he
publicly criticized the central bank's intervention policy to
support the ruble, the ruble depreciated at the weekly currency
auctions, but more recently its value has steadied. The central
bank also has announced that subsidized credits will be provided to
selected industrial firms, but under the program agreed with the IMF
the amount is to be sharply limited.
Economic Situation in Other Countries
In Mexico, the current account deficit widened in the first
quarter and private capital inflows have slowed in recent months. On
August 12, President Bush announced that the North American Free
Trade Agreement (NAFTA) negotiations have been completed. However,
ratification cannot occur before 1993. Brazil reached preliminary
agreement on a Brady-style debt restructuring package with creditor
banks July 9, but in light of political turmoil and Brazil's non-
compliance with the fiscal performance criteria of its IMF stand-by
arrangement, it is not clear when the agreement will be implemented.
In Argentina, economic activity has been booming, inflation remains
IV-26
relatively low, and performance under the IMF stand-by arrangement
has been satisfactory. However, the Argentine trade surplus has
dwindled due to rapid import expansion. Real GDP growth has slowed
slightly in Korea and growth in industrial output has slowed
markedly in Taiwan. On July 24, the Philippines signed a Brady-
style debt agreement with bank creditors.
Individual country notes. Mexico's current account deficit
widened to $4.4 billion in the first quarter of 1992 from $1.8
billion in the same period of 1991. This reflected mainly a
widening of the trade deficit. The current account deficit is
likely to exceed $17.5 billion for 1992 as a whole, up from $13.3
billion in 1991.
The capital account surplus narrowed to $5.6 billion in the
first quarter of 1992 from $6.5 billion in the same period of 1991.
Indications are that capital inflows slowed further in the second
quarter, when delays in completing the North American Free Trade
Agreement negotiations and a number of negative reports concerning
the Mexican Telephone Company fueled investor pessimism. This led to
a stock market sell-off in June that was reportedly accompanied by
some capital outflows.
Treasury-bill interest rates rose further in late June and
early July. They leveled off thereafter, as the Bank of Mexico sold
less of the 28-day bills than the amounts on offer at four of the
last five auctions and more of the longer-term bills than the
amounts on offer at eight of the last nine auctions. At the August
12 auction, the rate for 28-day T-bills was 16.9 percent, 244 basis
points higher than in mid-June, while interest rates on longer-term
bills (having maturities of 91 days and over) rose by more than 325
basis points over the same period.
IV-27
With interest rates 5 to 6 percentage points above their March
lows (depending on the maturity of the instruments), banks and
brokerage houses holding large quantities of three- and five-year
bonds had large unrealized capital losses. Many of them had
financed these assets with short-term funds raised abroad and were
forced to realize the losses when the availability of foreign funds
declined. These losses led to a drop in bank stock prices by 20
percent between July 21 and July 27, contributing to a 12 percent
fall in the Mexico City stock market index over this period, but
they do not appear to foreshadow failures of banks or brokerage
houses. Over the last four days of July, the stock market rebounded
by 7 percent, in large part because it was expected that the NAFTA
negotiations would be completed by August 3. However, when no
announcement came, the index dropped 4 percent. After the
announcement on August 12, the index was only fractionally higher.
The CPI rose 0.7 percent in June and 0.6 percent in July, when
it was 15.6 percent above a year earlier.
In Brazil, growing political turmoil is making an already
difficult economic situation worse. Political and popular support
for President Collor has eroded greatly over the past few weeks and
Congress is expected to consider in late August whether to impeach
him. The allegations include influence peddling, Collor's
acceptance of illegal payments from a business associate, and a
cover-up.
Press reports indicate that Central Bank President Gros has
threatened to resign rather than succumb to pressures to loosen
monetary policy, which has been depressing aggregate demand. The
central bank has been attempting to maintain a high interest rate
policy since October 1991. Real interest rates on 28- to 35- day
central bank securities were roughly 4 percent per month the week of
IV-28
August 3, which is very high, even for Brazil. (The high real
interest rates in large part reflect investors' perceptions that the
government will again default on its domestic debt.) Economy
Minister Moreira is under pressure to increase public spending, but
he has denied rumors that he will step down.
Anecdotal evidence indicates that economic activity remains
depressed. According to a private institute, the unemployment rate
in the city of Sao Paulo, Brazil's largest industrial center, was 16
percent in June, the highest level since Collor took office.
Inflation is expected to reach 25 percent per month in September,
compared with monthly inflation rates of 20-22 percent in recent
months, as a result of a scheduled 117 percent increase in the
minimum wage. Stock prices have dropped 30 percent since mid-June.
The cumulative trade surplus through July was $9.6 billion, compared
with a surplus of $7.9 billion over the same period in 1991.
Foreign reserves are estimated unofficially to have been as high as
$19 billion in June; the latest official reserve figure at the end
of April was $15 billion.
On July 9, Brazil reached preliminary agreement with its Bank
Advisory Committee on a Brady-style restructuring package on its
estimated $44 billion of commercial bank debt and on the estimated
$5 billion in interest arrears that have accumulated since January
1991. Under the agreement, creditors would exchange debt for one of
several options, including a reduced interest par bond, discount
bond, a temporary interest reduction bond (FLIRB), and a bond that
offers low interest rates for several years and capitalizes the
difference between 8 percent and these interest rates. There is
also a new money option. Collateral for principal and interest on
the par and discount bonds and for interest on the FLIRBs would be
phased in over a 2-year period after the initial exchange date.
IV-29
In light of the uncertainty over when a solution to Brazil's
pressing fiscal and monetary problems will be found, it is not clear
when the initial exchange will take place. Brazil needs to come up
with $3.2 billion for collateral at the initial exchange date; part
of this amount is expected to come from the IMF and other
multilateral sources. However, Brazil did not meet the fiscal
performance criteria under its $2.1 billion IMF stand-by arrangement
over the first two quarters of the year. Discussions between Brazil
and the Fund are on hold until there is a political consensus on
fiscal reform. The price of Brazilian debt on the secondary market
was $0.31 on August 12, down from $0.35 in mid-July.
In Argentina, economic activity surged in the first half of
1992, when industrial output was 16 percent higher than in the year-
earlier period. However, leading indicators suggest that the
expansion is slowing. Consumer prices rose 1.5 percent in July and
were 16.6 percent higher, than a year earlier. In the first five
months of 1992, the trade surplus was $160 million, compared with a
surplus of $2.1 billion in the same period a year earlier. Strong
domestic demand coupled with an appreciating real exchange rate has
led to rapid import growth.
Argentina is arranging to borrow about $3 billion from
international financial institutions and bilateral sources to
finance the collateral needed for its commercial bank financing
package.
On July 20, the IMF Executive Board concluded that Argentina
was performing well under its IMF stand-by arrangement. The
successful review allows Argentina to continue to draw Fund
resources. On July 22, the Paris Club of bilateral official
creditors rescheduled about $2.7 billion in payments falling due
from Argentina through 1995 over 16 years, with four years of grace.
IV-30
Korea's GDP rose a revised 7.8 percent in the first quarter of
1992 from a year earlier, slightly higher than real GDP growth in
1991 (Q4/Q4). Inflation continues the downward trend registered
since the beginning of the year; the consumer price index was 7
percent higher in June than a year earlier, down from an increase of
8.1 percent in the year ending January 1992. In the first half of
1992, due to a pickup in exports, the current account deficit fell
to $4.1 billion from $5.5 billion in the same period of 1991.
In early July, Korea widened the band of daily exchange rate
fluctuation from 0.6 to 0.8 percent on either side of the mid-rate
in accordance with its five-year plan to liberalize the financial
sector. The mid-rate is set by the Bank of Korea each morning based
on trading movement and volume of the previous day's interbank spot
trade.
In Taiwan, the industrial production index rose 3.3 percent in
June 1992 from the same period a year earlier, compared with a 6.2
percent increase in the year ending January 1992. Price
developments have been mixed; in June, consumer prices were up 5.2
percent from a year earlier, compared with a 4.3 percent increase in
the year ending January 1992, while wholesale prices appear to be
continuing to fall. Taiwan's cumulative trade surplus over the
first 6 months of 1992 was $5.3 billion, virtually the same as the
surplus over the same period in 1991.
In the Philippines, consumer prices rose 9.2 percent over the
year ending July 1992. On July 24, the Philippines signed a
comprehensive $4.8 billion Brady-style debt package with foreign
bank creditors. Under the terms of the agreement, banks will
exchange $3.6 billion of the country's $11.4 billion commercial bank
debt for a range of new bonds. A $1.3 billion buy-back completed in
IV-31
May was also part of the package. The plan is expected to reduce
interest payments by up.to $1.6 billion over the next six years.
On August 10, the government announced that all foreign
exchange controls will be lifted at the end of the month. Exporters
will be allowed to retain 100 percent of their foreign exchange
earnings, compared with 40 percent currently. Foreign exchange will
be allowed to be purchased from commercial banks without prior
approval of the central bank.